USD/JPY – All eyes on Bank of Japan, Yen slips

The Japanese yen has sparkled in the second half of July but has lost steam this week. USD/JPY is trading at 154.88 in the European session, up 0.57% on the day at the time of writing.

To hike or not to hike

The Bank of Japan meets early Wednesday and the markets aren’t sure what to expect. Will we see the first rate hike since March or will the policy markets again stay on the sidelines? The markets have priced in a 65% chance of a 10-basis point hike, which would raise rates to 0.1%-0.2%, while some economists expect a hike of 15 even 25 basis points.

Inflation remains above the BoJ’s inflation rate of 2% but is still relatively moderate, which means it isn’t really a factor in tomorrow’s crucial decision. With the Fed widely expected to cut in September, the US/Japan rate differential will narrow, putting less pressure on the BoJ to hike rates.

The BoJ is also expected to provide details on a quantitative tightening plan to cut bond buying by around half in the next 12 to 18 months. This would help contain inflation and put upward pressure on interest rates. Still, most of the buzz in the markets surrounds the rate decision.

Will Fed signal a September cut?

Following the BoJ policy meeting, the Federal Reserve meets later o n Wednesday. Unlike the BoJ meeting, there won’t be any drama around rates, as the Fed is virtually certain to hold the benchmark rate of 5.25%-5.5%, where it has hovered since July 2023.

Investors will be monitoring the rate statement and Fed Chair Powell’s follow-up rate statement. Will we see a signal of a September cut? The markets have priced in a quarter-point cut at 89% and a half-point cut at 10% according to CME’s FedWatch. Any hint of a rate cut in September could have a significant impact on the movement of the US dollar.

USD/JPY technical

• USD/JPY has pushed past resistance at 154.58 and is testing resistance at 155.13.

• 154.58 and 153.80 are the next support level.