Bank of Japan May Rock the Boat for USD/JPY. How?

JAPANESE YEN – USD/JPY OUTLOOK

• Bank of Japan’s decision on Friday will steal the limelight.
• BoJ is expected to stand pat on monetary policy, but could subtly signal that a change in strategy in looming on the horizon.
• This article looks at key USD/JPY levels to watch in the coming days

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The Bank of Japan will announce its September decision on Friday following the Fed’s verdict on Wednesday. The institution, led by Kazuo Ueda, is largely expected to stand pat on monetary policy, holding its key interest rate steady at -0.10% and keeping its yield curve control program unchanged.

In terms of forward guidance, the BoJ is likely to maintain its characteristic dovish tone, but may slowly start laying the groundwork for an exit from its ultra-accommodative stance to prevent market disruptions and minimize surprises when the actual policy shift begins to unfold.

Governor Ueda recently indicated that sufficient data on consumer prices may be available by the end of the year to make a decision on possible increases in borrowing costs. These comments suggest that there is a growing inclination among policymakers to consider moving away from negative interest rates.

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With headline inflation running above the 2% target for more than a year, excessive yen devaluation and oil prices on a tear, it wouldn’t be surprising to see a less dovish central bank. While ‘less dovish’ does not equal ‘hawkish’, it would still be a departure from the old status quo.

Any subtle change in the overall message that signals the central bank is finally starting to consider the possibility of adopting a less accommodative posture could be bullish for the Japanese yen, creating the right conditions for a brief rally against the U.S. dollar.

In the event of a USD/JPY pullback, the reversal could be of temporary nature, as multi-year highs in U.S. Treasury yields, particularly those on the long end of the curve, will continue to support the greenback’s attractiveness in the FX market for the foreseeable future.

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USD/JPY TECHNICAL ANALYSIS

USD/JPY fell towards 146.00 early last week, but found support and quickly rebounded, rising towards channel resistance near 148.00 in recent days. Despite its constructive bias, the pair has been unable to clear the 148.00 barrier decisively, with the bulls being repeatedly rebuffed in this region.

After latest rejection, sellers have gained some impetus, pushing the exchange rate towards 147.50 at the time of writing. If the pullback deepens in the coming sessions, initial support is seen at 145.90, followed by 144.55. On further weakness, the crosshairs will be fixed on 143.85.

On the flip side, if market momentum shifts in favor of buyers again, the first technical ceiling to watch is located around 148.00. Upside clearance of this resistance could reinforce upside pressure, opening the door for a move towards 148.80 and 150.00 thereafter.

USD/JPY TECHNICAL CHART

USD/JPY Chart Prepared Using TradingView