USD/JPY drifting as Fed decision looms

• Fed expected to pause, focus on dot plots

The Japanese yen continues to have a quiet week. In Wednesday’s North American session, USD/JPY is trading at 147.66, down 0.15%.

Fed widely expected to pause

If the Federal Reserve does not pause rate hikes at today’s meeting, it would be a massive surprise. Still, that doesn’t mean that investors aren’t paying close attention. There is particular interest as to whether the dot plot projections in June will remain the same. Those projections indicated one more hike before the end of the year and a cut in rates in 2024 to the tune of 100 basis points. Any change in the dot plot could trigger volatility from the US dollar.

Yen eyes core inflation, BoJ meeting

It has been a light week for Japanese releases, which helps explain why the Japanese yen has shown very little volatility. That could change with the Federal Reserve rate decision later today. The yen could show some stronger movement on Friday, with the release of Japan’s core CPI and the Bank of Japan policy meeting.

The Bank of Japan has insisted that inflation is transient, yet core inflation has hovered above the BoJ’s 2% target for seventeen consecutive months. That streak is likely to continue on Friday, with core CPI expected at 3.0% y/y for August, compared to 3.1% in July. The core-core CPI, which excludes fresh food and energy, is expected to accelerate to 4.4% y/y in August, up from 4.3% in July.

High inflation has put pressure on the BoJ to consider a shift from its ultra-loose policy, and there have been a few signals from BoJ members that the central bank is examining a possible exit. This has raised speculation about interest rate hikes in early 2o24, although that could be wishful thinking on the part of some market participants, as a rate hike would be nothing short of a sea-change in BoJ monetary policy.

The Bank of Japan meets on Friday and no shift in policy is expected. Still, BoJ meetings have gone from dull affairs to potential huge market movers and investors will be listening closely to Governor Ueda’s follow-up press conference, especially on inflation. Will Ueda stick to the narrative that inflation is transient or will he acknowledge that inflation is showing signs of being substantive?

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USD/JPY Technical

• There is support at 147.24, and 146.52
• 148.56 and 149.28 are the next resistance lines

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