USD/JPY Forecast: Japanese Yen Faces Fed’s Decisions and BoJ’s Stance

Highlights

• The USD/JPY rose 0.25% on Friday, capping a week of minor gains amidst volatility.
• Household spending and wage growth in Japan signal a delay in inflation shifts.
• Amidst the Fed’s watchful eye, the November and December rate decisions carry a cloud of uncertainty.

Friday Overview of USD/JPY Movements

On Friday, the USD/JPY rose by 0.25%. Following a 0.01% gain on Thursday, the USD/JPY ended the week up 0.04% to 147.830. A choppy session saw the USD/JPY fall to an early low of 147.334 before rising to a high of 147.951.

Bank of Japan on Target to Retain Ultra-Loose Policy Outlook

Talk of a Bank of Japan move away from negative rates delivered Yen volatility last week. However, economic indicators from Japan continue to support bets on the Bank of Japan staying in a negative-rate holding pattern.

Weak household spending and softer wage growth figures signal delays to any shift in the inflation dynamics. The Bank of Japan requires wage growth to fuel demand and demand-driven inflation. Demand-driven inflation would support a BoJ break from the current interest rate environment.

On Friday, the Bank of Japan will likely leave interest rates unchanged. However, the press conference will garner more interest than usual. Is there any real intent to move away from negative rates before inflation is sustainably heading toward 2%?

Economic indicators and monetary policy divergence suggest the status quo and a downward bias for the Yen.

Federal Reserve to Dictate the USD/JPY Trajectory

The market focus will be on the Fed this week, with the FOMC meeting commencing on Tuesday. While economists expect a Fed hold, uncertainty lingers over the November and December interest rate decisions.

US economic indicators support one final rate hike. The tight US labor market supports elevated wage growth. An upward trend in disposable incomes would fuel consumer spending and demand-driven inflation. Higher rates would counter wage growth, impact spending, and ease demand-driven inflationary pressures.

The increased level of uncertainty will place a greater emphasis on the FOMC economic projections. Upward revisions to growth and inflation and downward revisions to unemployment would support a more hawkish Fed interest rate trajectory.

Short-term Forecast

Considering the economic and monetary policy dynamics, the USD/JPY reaching 150 looks feasible. With the markets expecting the Bank of Japan to remain ultra-loose, the Fed remains in the driving seat. The hint of uncertainty toward the November interest rate decision leaves the USD/JPY at risk of another significant move on Wednesday.

USD/JPY Price Action

Daily Chart

The USD/JPY held above the 146.649 support level. A USD/JPY return to 148 would support a USD/JPY move to the 148.405 resistance level. However, a break below the 146.649 support level would give the bears a run at sub-145 and the 144.894 support level.

Market sentiment toward Japan and US economies and monetary policy expectations will be the key drivers today.

The 62.37 14-Daily RSI signals a USD/JPY move to the 148.405 resistance level before entering overbought territory.

4-Hourly Chart

The USD/JPY remains above the 50-day and 200-day EMAs, reaffirming bullish price signals. USD/JPY movement depends on Fed and BoJ forward guidance this week. A break below the 50-day EMA would support a USD/JPY move to the 146.649 support level.

However, a break above the 148.405 resistance level would bring the 150.293 resistance level into view.

The 61.71 14-4 Hourly RSI reading indicates a USD/JPY return to 148 before entering overbought territory.