USD/JPY Consolidates the Post-BoJ Surge as the Fed Looms

USD/JPY Analysis

The Bank of Japan took another step towards normalization - albeit a timid one- on Tuesday, increasing flexibility of its yield curve control (YCC). It will now allow 10-year government yields to rise past 1% before stepping in to buy bonds, making that level a reference point instead of a hard ceiling. However, the action underwhelmed markets and policy makers maintained their dovish stance, repeating their pledge to continue with monetary easing, in order to achieve price stability.

USD/JPY jumped on Tuesday after the underwhelming action by the Japanese central bank, which sustains the unfavorable policy differential with its US counterpart. The pair concluded its third consecutive profitable month, with a nearly 16% rally since the start of the year. It now tries to take out 152.20, which is the highest rate since July 1990. This will bring 155.78 in the spotlight, but it looks distant at this stage.

Yesterday we learned that Japan's Finance Ministry refrained from stepping in the FX market after the early-October jump ^[1], but USD/JPY remains on intervention watch, which can contain the upside. It backs off today, with the help of verbal support for the ailing Yen. Japan's vice Finance Minister for International Affairs Mr Kanda said officials are on standby to respond to the FX moves according to Reuters, while Chief Cabinet Secretary Mr Matsuno expressed readiness to act. ^[2]

As such, there is risk of pressures back towards the EMA200 (at around 129.00), but strong catalyst would be needed for that and the downside is well protected. Furthermore, FX interventions will likely have limited impact, unless the monetary policy differential with the Fed changes.

Markets are also cautious ahead of today's Fed policy decision, which will likely determine the next leg of the move, with a slew of economic releases before and after the main event. The US central bank has adopted a higher-for-longer stance and has kept more hikes in play, while Chair Powell recently said that policy is not too tight ^[3]. The economy is very strong with preliminary GDP data showing 4.9% expansion in Q3. Labor conditions are also tight, despite coming into better balance and although there has been significant progress on inflation, it is still high.

On the other hand, there have been a series of soft remarks by various Fed voters recently, which have undermined the hawkish bias. In any case, markets expect another hold today and the central bank's track record shows that it does not like to surprise. So focus will be on what's next. Chair Powell will once again have to thread the needle, keeping options open without sounding overly hawkish.