USD/JPY forecast amid heightened BoJ rate hike hopes

By:
on Feb 29, 2024
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  • The USD/JPY pair crashed hard on Thursday.
  • The BoJ hinted that the first rate hike in years is coming.
  • The Fed is expected to deliver fewer rate cuts than expected.

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The USD/JPY exchange rate nosedived on Thursday as investors focused on the actions of the Bank of Japan. It retreated to a low of 149.60, its lowest point since February 15th of this year. It has dropped by more than 57 basis points from its highest level this week.

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BoJ and Fed divergence

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The USD/JPY price retreated as investors focused on the potential Fed and BoJ divergence on monetary policy.

In a statement on Friday, a board member of the BoJ hinted that a rate hike was near since the country has stimulated inflation. The most recent report revealed that the country’s inflation rose to 2.0% in January.

Further, the economy is flashing mixed signals. A report on Thursday showed that the headline retail sales jumped by 2.3%, higher than the median estimate of 2.0%. 

While industrial production dropped by 7.5% in January, estimates are that it rose by 4.8% in February followed by 2.0% in March.

The other positive thing in Japan is that the stock market is booming, with the Topix and Nikkei 225 indices soaring to their record highs. This performance is drawing investments from foreign investors.

Meanwhile, the Federal Reserve is at a crossroads as the US continues sending mixed numbers. Data released this week showed that durable goods and consumer confidence tumbled hard in January and February, respectively.

Inflation, on the other hand, remains stubbornly above the 2.0% target. The headline CPI rose to 3.1% in January while core CPI sits near 4%. Like in the US, the Fed has an inflation target of 2%, which the US is taking long to get to. 

As such, analysts now are expecting the Fed to deliver at least three cuts this year. In a note to Invezz, ARNIM Holzer, the Global Macro Strategist at  Easterly EAB Risk said:

“We believe that the Fed is beginning to come to a view that, if in fact, the economy can reach a stable state, with productivity at reasonable levels, employment at reasonable levels, and steady market transactions, that the need to lower rates to stimulate activity and ease financial transactions and overall economic behavior is not as great as it may have been prior to the pandemic.”

USD/JPY forecast 

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USD/JPY chart by TradingView

Turning to the 4H chart, we see that the USD to JPY exchange rate has found a major wall at 150.85. It has failed to move above this level since Valentine’s Day, signaling a potential top. It has now retreated below the 50-period moving average and the key support point at 149.70, its lowest swing on February 20th.

Therefore, the outlook for the USD/JPY pair is bearish, with the next target to watch being at 148.80, the highest swing in January. The bearish view will become invalid if the pair moves above the key barrier at 150.85.

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