- Federal Reserve and Bank of Japan interest rate decisions are poised to create significant volatility in the USD/JPY currency pair.
- A 25 basis point cut by the Fed is anticipated, but market attention will be on revisions to future rate forecasts.
- The Bank of Japan's policy shift is uncertain; however, an increase of over 15 basis points could positively impact the yen.
- Increasing US Treasury yields are likely to bolster upward momentum for USD/JPY.
Pivotal Week Ahead
The concluding week of 2024 promises to be critical for USD/JPY traders as the Federal Reserve and the Bank of Japan announce interest rate decisions mere hours apart. These key developments are set to overshadow other economic data, including the core personal consumption expenditures (PCE) deflator, which will be released on Friday. The market's response to these decisions will likely shape the trajectory of USD/JPY as we transition into 2025.
Upcoming Central Bank Events
Leading up to this significant week, here’s a quick look at the major economic events scheduled for the US and Japan. All times are listed in US Eastern Time.
Source: TradingView
While indicators such as Tuesday’s retail sales and Friday’s PCE report will provide insight into the health of the US consumer—the cornerstone of the US economy—the week will predominantly be influenced by the Fed's interest rate decision rather than its preferred inflation metrics.
Market Insight on Fed's Possible Rate Adjustment
Recent comments from Jerome Powell indicating a reduced level of downside risks in the labor market, coupled with persistent inflation, have led to speculation regarding a potentially hawkish rate cut. How the Fed communicates its future plans will be crucial.
Current forecasts suggest that unemployment may be lower than expected, while inflation could exceed previous estimations. With predictions of 100 basis points in rate cuts for 2024, the critical focus will shift to the Fed's guidance for 2025, particularly concerning the neutral funds rate, where inflationary pressures and unemployment stabilize.
Source: Federal Reserve
Previous projections indicated a neutral rate of 2.9% despite recent data suggesting a more hawkish stance may be warranted. A shift to a projection of around 3% could influence US Treasury yields, likely exerting pressure on the Japanese yen.
Bond Market Reactions
Bond traders are positioning themselves for a hawkish turn, as evidenced by movements in US interest rate futures. Recent declines in both 2-year and 10-year Treasury note contracts imply expectations of increasing yields.
A decisive downturn in the 10-year Treasury note future has emerged, suggesting further price drops are likely, which would bolster US Treasury yields and could support the US dollar against the yen.
BoJ Decision's Expected Impact
The Bank of Japan's meeting on Thursday is expected to generate immediate volatility in USD/JPY. Traders remain uncertain about whether the BoJ will raise rates, and if so, by how much—options include 10, 15, or even 25 basis points. A delay in action until early 2025 is also a possibility.
In terms of recent price action, higher US Treasury yields have prompted the USD/JPY pair to regain upward momentum. After surpassing the critical 200-day moving average, bullish signals from momentum indicators support a favorable outlook. Key resistance levels are eyed at 153.80, 155.89, and the peak of 156.75, while downside support rests around the 200DMA, with additional levels at 151 and 148.65.
Wishing you success in your trading endeavors. Thank you for engaging with this analysis throughout 2024.
