The continued discrepancy between the US Central Bank’s strict policy and the Bank of Japan will continue to support the upward trend of the US dollar against the Japanese yen (USD/JPY). The pair stabilized around its highest level in 10 months, with gains reaching the 147.92 resistance level. It also stabilized around the 147.70 level at the time of writing the analysis and prior to the Federal Reserve’s announcement.
In general, financial markets remained volatile for weeks due to uncertainty about whether the Federal Reserve had finished raising US interest rates, which shook the markets. By raising its key interest rate to the highest level in more than two decades, the Fed helped cool inflation from its peak last year but at the cost of hurting investment prices and damaging some corners of the US economy.
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The Federal Reserve began its latest interest rate meeting on Tuesday, and an announcement is scheduled for Wednesday. The prevailing expectation is that the Federal Reserve will announce no change in interest rates. Accordingly, more focus will be placed on the updated forecasts provided by Federal Reserve officials regarding the direction in which they see US interest rates heading in the coming years.
Overall, traders are divided on whether the Fed might raise interest rates again this year, but they largely expect the Fed to start cutting interest rates next year. Such reductions can act as stimulants for financial markets, giving a boost to all types of investments.
Optimists say that US inflation has fallen enough to enable the Federal Reserve to cut interest rates significantly next year, while the economy continues to boom due to the strong labor market. Others say the Fed may need to keep interest rates higher for longer than investors expect to bring inflation down to its 2% target, while the risk of recession still looms.
A soft landing, where inflation returns to the Fed's target without the economy suffering a painful recession, is still possible, but unlikely in our view, and there remains a risk that the Fed may misread the temporary slowdown in inflation as accomplished. Its mission, which could lead to a cycle reminiscent of the late 1960s in which inflation accelerates again, the Fed raises interest rates further, and eventually a recession occurs.
High rates have already hit the manufacturing and housing industries. A report released Tuesday showed that homebuilders began construction on fewer new American homes in August than economists expected. The 11.3% decline from the July level was much worse than expectations of 0.8%. But building permit activity, a potential indicator of future activity, rose more than expected.
Expectations for the dollar against the Japanese yen today:
- There is no change in my technical point of view, just the performance on the daily chart below.
- The general trend of the currency pair, the US dollar against the Japanese yen (USD/JPY), is still bullish.
- It may remain so until Japanese intervention in the markets to prevent further collapse of the price of the Japanese yen against the rest of the other major currencies, led by the dollar.
According to the current general upward trend, the resistance levels 148.20 and 149.00 may be the next targets. Remember that the currency pair jumped last October to the resistance level of 151.94 until Japanese intervention in the markets occurred, as a result of which it drifted to the support level of 127.21 after that.
The US Federal Reserve’s announcement today is important for the course of the price of the US dollar against the rest of the other major currencies. Especially against the Japanese yen, as the Bank of Japan will announce its monetary policy decisions on Friday, and any surprise tightening may bring gains to the Japanese yen. In general, I still prefer to buy the dollar/yen from every falling level.
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