USD/JPY – Yen surges ahead of Fed rate decision

• Fed likely to raise rates by 25 bp
• Bank turmoil continues as two US regional banks see shares plunge
• USD/JPY has declined by 1%

The Japanese yen continues to show strong volatility, which started on Friday. In the North American session, USD/JPY is trading at 135.14, down 1.04% on the day.

Fed expected to deliver final rate hike

The Federal Reserve will announce its rate decision later today, and the markets are confident that the Fed will raise rates by 25 basis points, which would bring the benchmark rate to 5.25%. The markets have priced in a 25-bp hike at 87%, down slightly from the 93% probability earlier in the week.  Investors are expecting today’s increase to be a “one and done” which will wrap up the current rate-tightening cycle.

The economy is cooling and inflation is easing, which has raised expectations that the Fed will embark on an extended pause and possibly cut rates before the end of the year. One could make the argument that given this economic landscape, the Fed might be better off by pausing rates at today’s meeting, but it appears that Jerome Powell is determined to get the inflation genie back in the bottle as soon as possible. Inflation has eased considerably but is still running at a 5% clip, more than double the 2% target.

Another factor for the Fed to consider is the re-emergence of the banking sector crisis. First Republic Bank, whose collapse was the biggest bank failure since the GFC in 2008, has had its assets acquired by JP Morgan. That was followed by a plunge in shares of two US regional banks, and there are concerns that another hike today will put even more pressure on the troubled banking sector. The crisis has dampened risk sentiment and the safe-haven yen has been a big winner with sharp gains today.

The tightening in credit conditions since the bank crisis began in March is estimated to be the equivalent of a rate hike of between 25 and 50 basis points. That is unlikely to deter the Fed from the expected hike today, but it could be an important factor in future rate policy.

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USD/JPY Technical

• USD/JPY is testing support at 135.30. Next, there is support at 1.3450
• There is resistance at 137.57 and 138.37

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