Japanese yen extends gains, Fed rate decision looms

The Japanese yen is showing some strength this week and has gained 1.1%, rebounding from the previous week’s plunge of 2.2%. In Wednesday’s European session, USD/JPY is trading at 140.23, down 0.49%.

Spotlight on Fed, BoJ meetings

The US and Japanese central banks will be on center stage this week, with the Fed meeting later on Wednesday and the Bank of Japan on Friday.

The Fed is widely expected to raise rates today by 0.25%, which would bring the Fed Funds rate to a range of 5.25% to 5.50%. The FOMC will not release any economic forecasts, which means investors will be glued to Fed Chair Powell’s press conference, looking for clues about what the Fed plans to do with rates in the coming months.

The markets are confident that today’s rate hike will wrap up the current tightening cycle, but the Fed has not sounded as optimistic. Powell and other Fed members have warned that inflation is still too high and the battle is not over. True, inflation is under control at 3%, but there is still some distance to go before the Fed’s 2% inflation target is reached. Powell may take a middle-of-the-road approach in his remarks, hinting that the Fed will take a pause after today but keeping the door open to further hikes if needed.

Bank of Japan meetings used to be rather dull affairs with little or no impact on the currency markets. That has all changed in the world of high inflation, and even Japan is grappling with inflation which has persistently remained above the 2% target. This has put pressure on the BoJ to tweak its ultra-loose policy, as it did late last year when it widened the target band on 10-year Japanese bonds.

The BoJ has insisted that it won’t change policy settings at Friday’s meeting, but there is still speculation that the central bank could make a move and send the yen sharply higher. With inflation running around 3%, BoJ meetings have become market-moving events and investors will be keeping a close eye on Friday’s meeting.

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USD/JPY Technical

• USD/JPY is testing support at 140.49. Below, there is support at 139.73
• There is resistance at 141.47 and 142.62

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