The Japanese Yen (JPY) is persisting with its relatively weaker performance, as there are still doubts regarding the likelihood of a significant shift in the Bank of Japan’s (BoJ) dovish stance. At the close last week, the USD/JPY pair recorded a modest gain of 0.04% to reach 147.830. During a volatile session, the USD/JPY pair initially declined to a low of 147.334 before rebounding to reach a peak at 147.951.
This performance, combined with the generally positive sentiment in equity markets, is considered a factor eroding the JPY’s status as a safe-haven currency and providing support for the GBP/JPY pair. However, it’s worth noting that recent statements by BoJ Governor Kazuo Ueda have sparked speculation that the Japanese central bank might consider moving away from its ultra-loose monetary policy.
Fed meeting to sets tone for USD/JPY pair
This week, the focal point of the market’s attention will be the Federal Reserve, as the Federal Open Market Committee (FOMC) meeting kicks off on Tuesday. Although economists anticipate that the Fed will maintain the current interest rates, there remains uncertainty surrounding the decisions for November and December.
US economic indicators provide grounds for considering one final rate increase. The tight labor market in the US supports a sustained growth in wages. An upward trajectory in disposable incomes would drive consumer spending and, consequently, demand-driven inflation. However, higher rates could counteract wage growth, impact spending, and alleviate pressure from inflation driven by demand.
The level of uncertainty has escalated, underscoring the significance of the FOMC’s economic projections. If there are upward revisions in growth and inflation coupled with downward revisions in unemployment, this would bolster a more assertive interest rate trajectory from the Fed. A USD/JPY pair return to 148 would pave the way for a move towards the resistance level at 148.405. Conversely, a breach of the 146.649 support level would provide the bears an opportunity to target below 145 and the support level at 144.894.
Market sentiment towards the Japanese and US economies, as well as expectations regarding monetary policies, will be the key determinants today. The 14-day Relative Strength Index (RSI) at 62.37 signals a potential move for the USD/JPY pair towards the 148.405 resistance level before entering overbought territory.
More central bank meetings set to shape Japanese Yen
The upcoming week is packed with significant economic events, including key central bank rate decisions from the Bank of England and the Bank of Japan.
BoJ Governor Kazuo Ueda recently mentioned that ending negative interest rates is one of the options available if the BoJ gains confidence in sustainable increases in prices and wages. Additionally, the reduced likelihood of a more aggressive policy tightening by the Bank of England (BoE) is contributing to limiting the upside for the GBP/JPY cross. BoE Governor Andrew Bailey stated that the central bank is now “much nearer” to concluding its series of interest rate hikes.
Furthermore, concerns about a potential economic downturn and indications that the UK labor market is cooling could prompt the BoE to pause its rate-hiking cycle. Traders appear cautious, opting to wait on the sidelines in anticipation of this week’s critical data releases and central bank events. UK consumer inflation figures are slated for release on Wednesday, followed by the significant BoE monetary policy meeting on Thursday. These events will strongly impact the British Pound and offer a substantial catalyst for the GBP/JPY cross.
Subsequently, market attention will shift to the BoJ’s monetary policy update on Friday, potentially introducing volatility to JPY pairs. This development may aid investors in determining the next directional move for the GBP/JPY cross. In the meantime, spot prices are more likely to consolidate within a range, given a Japanese holiday and the absence of noteworthy market-moving economic releases from the UK on Monday.
Central banks in countries like Brazil, Mexico, and Chile have also initiated rate cuts, reducing the potential returns on certain lucrative trades. Despite the associated risks, an increasing number of traders still perceive value in using the yuan as a means to diversify funding risk in their carry trades.
Over the past two years, yen carry trades have flourished as nearly every central bank outside of Japan aggressively raised interest rates. However, there is now concern that the BoJ may follow suit, particularly as inflation has consistently exceeded its 2% target for over a year. Traders have recently priced in expectations that the bank will implement rate hikes starting in January.
