USD/JPY Maintains Upside Bias, Despite IMF’s Call for the BoJ to End Yield Curve Control

USD/JPY Analysis

Although the Fed's December projections clearly suggest three hikes this year ^[1], last week's policy meeting showed a reserved approach. The economy is very strong and so is the labor market, with the last release revealing the largest job creation in a year. Price pressures have eased substantially, but recent data have shown stickiness. As such, policymakers want "greater confidence" that inflation is moving "sustainably" towards the 2% target and Chair Powell doused hopes of a March pivot. ^[2]

Market expectations have now moderated, with CME's FedWatch Tool assigning the highest probability for the first cut to occur in May and lead rates 125 basis points lower by the end of the year (from 150 bps previously). ^[3]

The Bank of Japan meanwhile, maintained its ultra-loose stance last month, with quantitative easing, yield curve control and negative interest rates. Officials remained committed to monetary easing, offering no indication of immediate shift.

USD/JPY runs its second straight ascending month and heads towards the conclusion of a profitable week, as a result of these developments. This keeps the 152.2 handle in its crosshairs, which is the highest levels in nearly thirty-four years.

On the other hand, the Fed pointed to peak rates, expects to lower them this year and markets still see multiple cuts, despite the moderation in their pricing. Furthermore, the BoJ has hinted towards an eventual policy shift, as inflation has stayed above target for nearly two years.

Although not hawkish, the remarks of Deputy Governor Uchida yesterday, heighten chances of a change. He said that "if sustainable and stable achievement of the 2 percent target comes in sight", the policy setting would have fulfilled its role and policy makers "will explore whether it should be revised" ^[4]. Adding to the above, the International Monetary Fund (IMF) urged today the central bank abandon its asset purchase program and yield curve control "now while gradually raising short-term policy rates thereafter" ^[5].

Along with overbought conditions, this could pressure USD/JPY and lead to a breach of the EMA200 (at around 147.00). Daily closes below tit would pause the bullish momentum, but the downside appears well protected, with the daily Ichimoku cloud providing the next area of support.

The next leg of the move will be determined by Tuesday's US CPI inflation update and any surprise from today's revisions.