USD/JPY Subdued Ahead of the Fed & the BoJ

USD/JPY

USD/JPY had gapped lower last Monday, after hawkish remarks from the Bank of Japan Governor, who pointed towards an exit from negative rates, speaking to The Yomiuri Shimbun. The central bank has been implementing a super-loose monetary strategy to the detriment of the Yen. Back in July policymakers had essentially widened the yield curve control, which is a step towards normalization, but also a move that allows them to maintain the dovish stance for longer.

Mr Ueda had not shown any inclination to divert from the current approach and his comments marked a turning point, but he did not indicate immediate action. In any case, they set an interesting and more uncertain backdrop for Friday's policy decision by the BoJ.

The Fed preceded is its Japanese counterpart, since it announces its decision on Wednesday. Markets widely expect a hold and view the current 5.5% as the terminal rate, although there is less conviction around the latter. Focus will on the participant view on the terminal rate and Chair Powell commentary around what ahead. The last dot-plot from June shows a terminal rate of 5.6% which suggest another hike for the peak ^[1]. Mr Powell had kept more hikes firmly in play at Jackson Hole ^[2] and could maintain the hawkish bias. Inflation has eased substantially but is still high, whereas the labor market and the economy are strong, despite signs of softening.

These pivotal policy decisions will determine the trajectory of USD/JPY. The pair has pretty much covered the Ueda-gap, as the policy differential remains favorable. It has 148.83 in its eyesight, but will likely need fresh catalyst for taking out.

On the other hand, USD/JPY is subdued today and has not been able to convincingly close the aforementioned gap so far. This keeps renewed pressure in play, but under current conditions we struggle to see sustained weakness below the EMA200 (145.60-70).