Choppy trading for USD/JPY: A Look Ahead to Central Bank Meetings

Choppy trading for USD/JPY: A Look Ahead to Central Bank Meetings

The USD/JPY currency pair has been experiencing fluctuating movements recently, with a potential bottom forming around the 146.50 mark. As we look forward to the upcoming meetings of the U.S. Federal Open Market Committee (FOMC) and the Bank of Japan (BOJ) Policy Board, the pair is expected to exhibit choppy action, with significant policy decisions on the horizon.

Bank of Japan’s Policy Shift Speculation

The BOJ board is set to meet on March 18-19, and there is widespread speculation regarding a potential shift in monetary policy. The debate over the central bank’s exit from its ultra-easy monetary stance is anticipated to be intense. While there may be some dissenting voices, it is expected that the majority, led by Governor Kazuo Ueda, will maintain the current policy for the time being. This cautious approach is likely due to the need for more economic data and the awaited wage hikes from medium-to-smaller firms, which constitute around 70% of Japanese output.

Federal Reserve’s Rate Cut Expectations

On the other side of the Pacific, the market has recently adjusted its expectations of rate cuts by the Fed, reducing them from four to three. If upcoming U.S. economic data, including the Producer Price Index (PPI), retail sales, and initial jobless claims, turn out strong, these expectations could be further trimmed to just two rate cuts. Such outcomes could significantly influence the trajectory of the USD/JPY pair.

Recent Movements and Future Outlook

The USD/JPY pair has retreated from the 150 handle seen during most of February to levels around 146.48 on March 8 and 146.49 on March 11. This pullback was driven by speculation of larger Fed rate cuts and lower yields, as well as the anticipation of an imminent policy shift by the BOJ. However, as these expectations have since waned, a base for USD/JPY may have been established.

Looking ahead, the direction of the USD/JPY will hinge on incoming U.S. economic data and the response of U.S. yields. Key resistance is eyed at the March 12 high of 148.20 and the Ichimoku kijun line at 148.68. Meanwhile, the ascending daily Ichimoku cloud between 144.87-146.93 is expected to provide robust support.

Inflation and Interest Rate Prospects in Japan

The likelihood of inflation in Japan moving towards the BOJ’s 2% target is steadily increasing. Masahiko Kato, chairman of the Japanese Bankers Association, refrained from commenting on the possibility of ending negative interest rates at the upcoming policy meeting. However, he emphasized that the BOJ would appropriately conclude negative rates depending on economic, price, and financial conditions.

As this year’s annual wage negotiations have yielded significant wage rises for employees of some major companies, investors are increasingly betting on a policy shift next week. Such a move could signal the phasing out of the BOJ’s monetary stimulus, marking a historic shift from the massive stimulus program and Japan’s first interest rate hike since 2007.

In conclusion, the upcoming central bank meetings are poised to be pivotal events for the USD/JPY pair, with potential policy shifts and economic data set to shape its short-term and medium-term trajectory. As always, investors and traders should stay vigilant and closely monitor developments to navigate the choppy waters of the currency market effectively.