USD/JPY: Yen hovers at 10-month low ahead of BOJ rate decision.

The USD/JPY is hovering near its highest level since June 2020 as the market waits for the Fed and Bank of Japan (BOJ) interest rate decisions. It is trading at 109.11, which is 6% above the lowest level this year.

BOJ decision ahead

The BOJ will start its two-day monetary policy meeting tomorrow and deliver the verdict on Friday morning.

This meeting comes at an important time for the Japanese economy. Recent data have painted a mixed picture for the economy. For example, exports declined by 4.5% in February after rising by 6.4% in the previous month. This was the first decline in three months. In the same period, exports rose by 11.5%, pushing the overall trade deficit to more than $2.4 billion. 

Meanwhile, the overall unemployment rate has remained below 3%, which is impressive. However, this performance has defied the Philip’s curve since consumer inflation has remained stubbornly low. 

In general, like most central banks, the BOJ is expected to leave interest rates unchanged. However, the bank will also publish its biggest monetary policy review since 2016. This review could open doors for the bank to tweak its asset purchases. For example, according to analysts who spoke to FT, the bank could decide to only buy bonds and stocks when the market is calm. 

The Bank of Japan’s balance sheet is now more than 135% of the total GDP. It also owns about 7% of all stocks listed in Japan.

Before the BOJ decision, the USD/JPY will react to the Fed decision that will happen later today. Like other central banks, the Fed will likely leave interest rates at near zero and continue with its open-ended quantitative easing policy. It will also address the recent surge in US Treasury yields.

USD/JPY technical outlook

The daily chart shows that the USD/JPY was in a declining channel between July last year to January this year. The currency pair made a bullish breakout on January 28 and has risen by almost 5% since then. The price has been in consolidation in the past few days as forex traders question whether the rally has more room to run. It is slightly below the upper side of the widened Bollinger Bands. Therefore, while the upward trend may remain, a pullback cannot be ruled out.