US Dollar Analysis: USD/JPY Dips Ahead of BOJ, Fed

USD/JPY Key Points

• Reports suggest the BOJ will consider further relaxing its Yield Curve Control (YCC) program at its meeting tonight.
• The Fed is unlikely to tweak interest rates and will likely stick to a “data dependent” approach to monetary policy.
• USD/JPY is showing signs of rolling over, but remains in a longer-term uptrend.

USD/JPY Fundamental Analysis

It’s been a quiet, cautiously optimistic start to the trading week for risk appetite, but economic data is poised to pick up in earnest over the next 24-48 hours. In addition to the usual end-of-month rebalancing flows, traders are also on tenterhooks ahead of the Bank of Japan’s monetary policy meeting tonight and the Federal Reserve’s equivalent gathering on Wednesday.

Looking first to the BOJ, a late-breaking report from Nikkei suggested that the central bank was considering adjusting its Yield Curve Control (YCC) program again to allow 10-year government bond yields to rise above 1% in an extension of its move this summer. While not strictly a “rate hike” per se, such a move would be akin to policy tightening and could boost the yen further.

Beyond any direct changes to monetary policy, traders will also be keen for BOJ policymakers’ economic projections, particularly inflation, which is on track to eclipse the central bank’s 2% target for the second straight year.

On Wednesday, the Federal Reserve’s FOMC will announce its own interest rate “decision,” though hardly anyone expects it to be a “live” meeting with actual changes to monetary policy. Instead, traders will key in on any adjustments to the FOMC’s monetary policy statement and Fed Chairman Jerome Powell’s press conference.

With economic data continuing to show strong growth and inflation moderating, the central bank is currently tracking toward achieve its dual mandate. At the same time, the market-driven rise in longer-term bond yields has some of the same effects as an outright change in monetary policy, potentially allowing the Fed to sit on its hands for longer than it otherwise could have.

Expect Mr. Powell to stick to the well-established “data dependent” script, leaving the door open for another interest rate increase if necessary while stopping while short of pre-committing to any moves in either direction.

US Dollar Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

Ahead of this week’s dueling central bank meetings, USD/JPY is showing signs of rolling over. After briefly making a run above 150.00 last week, rates have reversed back toward 149.00 as we go to press, leaving the pair (just) in negative territory over the course of month so far.

Much will hinge on the fundamental outlooks of the Bank of Japan and Federal Reserve, but from a purely technical perspective, the pair remains within a longer-term uptrend, though rates are on track to close below their 21-day EMA for the first time since late July. A deeper dip may take rates down toward the 50-day EMA near 148.00, whereas the key level to watch on the topside will be around 150.00, where traders start to worry about the potential for intervention from the BOJ once again.

-- Written by Matt Weller, Global Head of Research

Follow Matt on Twitter: @MWellerFX