Overnight in Tokyo, the Bank of Japan left interest rates and monetary policy unchanged as expected, but lowered its inflation outlook. The 2017 inflation forecast was lowered to 0.8% from the previous 1.1%, while the 2018 forecast was lowered to 1.4% from the previous 1.5%. No changes were made to the BoJ’s massive stimulus program, nor were there any indications that the central bank would veer from its extensive monetary easing path anytime soon. While a dovish Bank of Japan is nothing new or unexpected, Tuesday’s statement and press conference pressured the Japanese yen due to the central bank’s reduced inflation outlook along with heavy doubts that the BoJ would tighten monetary policy anytime in the foreseeable future.
Meanwhile, the US dollar has been down modestly since the beginning of the week, but still remains supported on high expectations of both a December interest rate hike from the Federal Reserve and the appointment of a potentially more hawkish Fed Chair by President Trump, possibly this week. Late last week, the dollar broke out sharply as Fed anticipation and US fiscal policy developments, most notably with respect to tax reform, helped to boost the dollar’s prospects.
This Wednesday brings the conclusion of the November FOMC meeting and release of the Fed’s interest rate decision and policy statement. No rate change is expected at this meeting – as noted, markets are heavily expecting the next rate hike to occur in December – but the content of this November meeting will be important in setting expectations going forward. On Friday, the US non-farm payrolls data for October will be released along with wage growth numbers and the unemployment rate. Current expectations are high for an exceptionally sizeable bounce-back in October US employment after September’s weather-driven job losses.
From a technical perspective, USD/JPY turned down late last week from a major resistance area around the 114.50 level, which had been previously tested and respected twice this year – in May and July. Tuesday’s Bank of Japan decision has helped boost USD/JPY to begin approaching that resistance once again. Amid the sharp and potentially growing monetary policy divergence between the Fed and BoJ, USD/JPY could be poised for further potential gains. With any sustained breakout above the noted 114.50-area resistance, the next major medium-term target to the upside remains around the key 118.00 resistance area.