It was a dismal week for the Japanese yen, as USD/JPY climbed for an eighth successive week. In the European session, USD/JPY is trading quietly at the symbolic 130 level.
Fed expected to hike by 0.50%
Japanese markets are closed for a holiday on Tuesday and Wednesday, but it will likely be a busy mid-week for the yen, as the Federal Reserve holds a key policy meeting on Wednesday. The Fed is virtually certain to raise rates by 0.50% at the meeting, but there is still an air of anticipation in the air, even though the oversize rate increase has been priced in.
First, the Fed hasn’t raised rates by 0.50% in 20 years, so such a move would certainly be a monumental event. A large hike sends a strong message to the markets that the Fed is determined to push inflation back down to its 2% target, and is looking to raise rates to a neutral level of 2.5% and then slow the pace of tightening. The challenge for the Fed is to raise rates without stalling the economy. Investors are already looking ahead to the June and July meetings, which are also likely to feature 0.50% hikes. Some analysts are projecting 0.75% hikes at future meetings, an event we haven’t since 1994. The fact that a super-super hike of 0.75% is being bandied around shows how far the Fed has fallen behind in the inflation curve, as it plays a desperate game of catch-up.
With the Fed showing an aggressive tightening mode, the outlook for the dollar is positive, and I expect the yen to remain under strong pressure. USD/JPY has broken above the 130 line much more quickly than expected, and with US yields on a strong upswing, the US/Japan rate differential continues to widen, as the BoJ is fiercely defending its yield curve control.
- USD/JPY has broken below support at 129.89. Next, there is support at 1.2807
- There is resistance at 1.3122 and 1.3304
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