Japanese inflation unlikely to sway BoJ towards policy change

  • BOJ Likely to remain aberrant in the race to tighten, risk of further losses for the yen.
  • 145.00 Resistance seen as the key.

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Sep 26

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USD/JPY BASIC CONTEXT

USD/JPY rallied in European trading as we remain within the 141.50-145.00 range which provided much needed resistance last week. The yen’s temporary strength was attributed to news that the Bank of Japan conducted a currency ‘verification’, a move seen as a precursor to formal intervention.

With USD/JPY sitting near its lowest level in 24 years after its largest annual decline on record

and further rate hikes expected US Federal Reserve, signs remain ominous for the yen. As talk of intervention grows, we have heard Governor Kuroda state that an intervention is on the table and, if necessary, it will be delivered quickly and without warning. Meanwhile, comments this morning from Japanese Finance Minister Shunichi Suzuki said the BOJ will steer its policy appropriately taking into account prices and the health of the economy. He confirmed that reserve funds will be used for essential increases in production and prices, suggesting that further support measures could be introduced rather than monetary intervention.

USDJPY

Source: Bloomberg

FOMC and BOJ MEETINGS and POTENTIAL IMPLICATIONS.

The US Federal Reserve This week’s meeting should set the stage for the fourth quarter as markets wait impatiently. The implications of the meeting will be felt in global markets, with the Fed leading the tightening cycle while remaining in a better economic position than some of its peers. This week’s meeting is expected to see a further 75bp rise, however, most of this rise is priced in, it will be the meeting minutes and Fed Chairman Powell’s speech that will drive interest.

The Bank of Japan (BOJ) On the other hand, it is unlikely to change direction despite the rise in inflation announced today. Sources familiar with the matter say massive rate hikes would be needed to inject some strength into the yen, but the BOJ remains unconvinced that the current rate of inflation warrants such action. The bank fears damage to the economy as wage growth continues to slow while inflation is expected to plateau going forward. With that in mind, it’s hard to imagine a bullish BOJ at the minute as I expect policy and rate hikes to remain unchanged for some time.

For all economic news and events affecting the market, see the DailyFX Calendar

As things stand, the Fed is likely to drive any decision USD/JPY this week with the BOJ a supporting actor if you will. Markets are currently pricing in an 84% chance of a 75 basis point hike while there remains a 16% chance for a full percentage point. If the Fed were to offer a 75 basis point hike on Wednesday, coupled with a bullish outlook and a year-end rate above 4.25%, I would expect the dollar bulls to take matters into their own hands. hand and lead USD/JPY upper. Alternatively, if we get a 75bps rally followed by dovish comments and a year-end rate target around 4.00-4.25%, we should see USD/JPY pull back even if it could be short-lived.

How Central Banks Impact Foreign Exchange Markets

USD/JPY Daily chart September 202022

USDJPY daily chart

Source: Trading View

From a technical perspective, we can see from the daily time frame above that the discussion for intervention occurred when price hovered around the 145.00 area, the upper end of the range. . Given the fundamentals underlying this pair, it is unwise to speculate on technical data alone at this stage. At the moment, the range we are stuck in on a daily time frame extends from 141.50 to the 145.00 area, and I expect price action within the range until the market meeting. Fed tomorrow. We are currently trading above 20, 50 and 100-SMA with the gradients indicating further upside might be in store. A bullish move after the FOMC will have to see us break out of the 145.00 level if we are to test the 1998 highs at 147.75 or push down. psychological level key 150.00. Alternatively, a surprise of Yen strength could see us test the lower end of the range and then the 140.00 level.

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Key intraday levels worth watching:

Support areas

• 143.00

•142.20

•141.50

Areas of resistance

• 144.00

• 145.00




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Written by: Zain Vawda, Markets Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda

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