- High interest rates might lead to more cracks in the US labor market.
- US inflation will likely reach the 2% target sustainably.
- The BoJ will keep tightening monetary policy.
The USD/JPY outlook paints a pessimistic picture as the dollar tumbles after Powell’s strongly dovish tone. Meanwhile, the yen strengthened after BoJ governor Kazuo Ueda maintained that the central bank would hike rates if inflation rose as expected.
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The policy outlooks in Japan and the US have diverged yet again. However, this time, it is in favor of the yen. FOMC meeting minutes last week revealed that policymakers were ready to start lowering interest rates. However, Powell’s tone on Friday was more dovish and his guidance clearer.
According to him, inflation will likely reach the 2% target sustainably. Meanwhile, high interest rates might lead to more cracks in the labor market. Therefore, it is time for the Fed to adjust its policy. A pivot from high interest rates to rate cuts will likely mean a weaker dollar. At the same time, there will be less motivation to hold high-yielding US assets when the Fed starts cutting rates. Therefore, this will lead to an unwinding of the popular carry trade, boosting the yen.
At the same time, the Bank of Japan is pivoting to a more hawkish outlook. Initially, there were fears that the market turmoil witnessed after the first rate hike would put a pause in policy adjustment. However, BoJ Governor Kazuo Ueda dismissed these fears.
Ueda said as long as inflation is rising as expected, the central bank will keep tightening monetary policy. Consequently, the yen will strengthen and the interest rate gap between Japan and the US will shrink.
USD/JPY key events today
It will be a slow start to the week with no key events. Therefore, investors will keep digesting Friday’s policy remarks.
USD/JPY technical outlook: Bears target 142.56 amid surge in momentum
On the technical side, the USD/JPY price has finally fallen, detaching from the 30-SMA and the 0.382 Fib level. Therefore, the bearish bias has strengthened with the price far below the SMA and the RSI nearly oversold.
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Bears are now heading for the 142.56 support level. A break below this level will solidify the bearish bias and lead to lower prices. On the other hand, if the level holds, the price might pause or reverse.
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