Fed sends yen sharply lower

The Japanese yen is in positive territory, paring some of the sharp losses from Thursday. In the European session, USD/JPY is trading at 137.12, down 0.48%.

Dollar rises as Fed hints at more rate hikes

The Japanese yen has shown some strength recently, but it was the dollar’s day on Thursday, with broad gains against the majors. USD/JPY jumped 1.7%, briefly punching above the 138 line. The Fed has been consistently sending out a hawkish message, but the markets seemed a bit intoxicated over recent inflation reports which showed a downturn and were lower than expected. To the market’s surprise, Jerome Powell didn’t show much enthusiasm about the recent inflation data, saying that more evidence was needed to convince the Fed that inflation was on a “sustained downward path.”

This week’s 0.50% rate hike raised the benchmark rate to 4.50%, its highest level since 2007. The rate statement was hawkish, stating that the Fed expected “ongoing increases” in interest rates. This poured cold water on market hopes that the Fed was poised to wrap up its current rate cycle at the next meeting in February. This message was not new, as Powell has said that he anticipated the terminal rate being higher than the September forecast. The terminal rate is likely to rise above 5%, with some forecasts projecting that rates will go as high as 5.6%.

The Fed’s hawkish stance will likely mean a bumpy road for the yen. The post-Covid recovery has been slow, and the uncertain global economy outlook is not good news for Japan’s export sector. The Bank of Japan is in no hurry to change its ultra-loose policy, which means that the US/Japan rate differential will continue to widen after the New Year. Inflation is rising in Japan, but the BoJ is an outlier in that inflation is not a number one priority.

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USD/JPY Technical

• USD/JPY is testing support at 137.07. This is followed by support at 136.20
• There is resistance at 138.25 and 138.90

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