USD/JPY: BOJ and Fed Interest Rate Decision Preview

Apr 27, 2021 07:18 PM ET
USD/JPY: BOJ and Fed Interest Rate Decision Preview

The USD/JPY pair is in the spotlight this week ahead of key interest rate decisions by the Bank of Japan (BOJ) and the Federal Reserve. The pair is trading at 107.70, which is 2.95% below the highest level this year.

Bank of Japan meeting preview

The BOJ started its two-day monetary policy meeting today and is scheduled to publish its rate decision on Tuesday morning. The meeting comes at an important point for Japan. For one, the Japanese yen has been on a bullish momentum against the US dollar and is trading at its highest level since March 4. 

This has disadvantaged the country’s exporters by making their goods relatively expensive abroad. Indeed, the Nikkei 225 index has struggled to move above the year-to-date high of ¥30,660. 

The decision also comes at a time when the Japanese economy is recovering, albeit at a slower pace than its peers. Last week, data by Markit showed that the manufacturing PMI rose to 53.3 in April, which is lower than that of other countries like the United States and the United Kingdom. 

Further data have revealed that Japan’s inflation is still below zero, making it almost impossible for the BOJ to hike rates. This is partly because of the demographic challenges that the country is facing as its population ages leading to weak consumption.

The BOJ decision also comes at a time when the country is seeing an uptick of coronavirus cases in important cities like Kyoto and Tokyo. Further, the government has lagged in other countries in its vaccination process. It has only vaccinated less than 2% of the population while other countries like the US and UK have vaccinated more than 40% of their population.

Therefore, the USD/JPY price will react to the outcome of the BOJ decision on Tuesday morning. Economists expect that the bank will leave interest rates in the negative zone where they have been for years. They also believe that the bank will continue with its yield curve control and quantitative easing. These policies have pushed the bank’s total assets to more than $7.1 trillion, which is substantially higher than the country’s total GDP of slightly below $5 trillion.

BOJ balance sheet

BOJ balance sheet

Fed decision ahead

The USD/JPY will also be watched because of the Federal Reserve interest rate decision that will come out on Wednesday. The decision will also come at an important time. For one, other central banks like Norges and Bank of Canada have started hinting at tightening. In its recent decision, the BOC announced that it would slash its weekly asset purchases by C$1 billion to C$3 billion. 

The Fed decision at a time when its balance sheet has also rocketed to more than $7.8 trillion from $3.7 trillion a year before. Also, recent economic numbers have been relatively positive. Last week, the US jobless claims came below 600k for the second week in a row. 

At the same time, because of stimulus and vaccinations, the US retail sales, inflation, industrial and manufacturing production, and business output have soared. The unemployment rate has fallen to 6%. Therefore, the USD/JPY will react to what the Fed will do amid these conditions.

USD/JPY technical forecast

USD/JPY chart

The daily chart shows that the USD/JPY pair has dropped in the past seven straight days. Along the way, it has moved below the 38.2% Fibonacci retracement level, and the 25-day and 15-day smoothed moving averages (SMMA). The two lines of the MACD have moved below the neutral line also. Therefore, the pair will likely keep falling as bears target the 50% retracement at 106.52.

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