USD/JPY forecast: traders bet on yen ahead of the BoJ, Fed decisions

The USD/JPY exchange rate pulled back this week as focus shifted to the upcoming Federal Reserve and Bank of Japan (BoJ) interest rate decision. It fell to a low of 146.25, down by almost 3% from its highest level in July.

Federal Reserve interest rate decision 

The USD/JPY exchange rate pulled back sharply as traders waited for the upcoming Federal Reserve interest rate decision.

All indications are that the bank will cut interest rates by 0.25% in this meeting as they make a strategic shift from focusing on inflation to the labor market.

Data released earlier this month showed that the economy created just 22,000 jobs in August as the unemployment rate rose to 4.3%. Wage growth momentum also stalled during the month.

More jobs numbers have painted to an economy that is not doing too well. According to the Bureau of Labor Statistics (BLS), the number of job vacancies in the UK has slowed in the past few months.

Additionally, a recent revision showed that the economy lost jobs in June for the first time since the pandemic era.

Companies have been reluctant to employ in the past few months because of Donald Trump's tariffs, which have increased costs across the board. 

The USD/JPY exchange rate slump has coincided with the ongoing decline in US bond yields, with the 10-year yield falling to 4.02% and the five-year yield to 3.65%. Also, it has coincided with the ongoing stock market rally, with the S&P 500 and Nasdaq 100 indices jumping to a record high. The gold price has also jumped.

Bank of Japan interest rate decision 

The other notable catalyst for the USD/JPY exchange rate is the upcoming Bank of Japan interest rate decision on Friday.

Unlike the Federal Reserve, the BoJ is taking a different route on interest rates this year. While economists expect the bank to leave interest rates unchanged, there is rising expectation that the bank will hike interest rates at least once this year.

The BoJ has been concerned about the stubbornly high inflation despite the recent improvement. Recent data showed that the country’s inflation dropped to 3.1% in July, the lowest level since March this year. While the drop was notable, it remained much higher than what analysts were expecting.

As such, in theory, a situation where the Fed is cutting rates and the BoJ is cutting would benefit the Japanese yen, which explains why many investors have taken the position. In a note, BlueBay Asset Management, which has taken the position, said:

USD/JPY technical analysis 

The daily timeframe shows that the USD/JPY exchange rate has pulled back in the past few months, moving from a high of 150.96 in August to 146.5p today. It recently dropped below the 50-period Exponential Moving Average (EMA).

The pair is now attempting to drop below the important support level at 146.30, a level it has failed to move below since July. This price is also along the bottom of the trading range of the Murrey Math Lines tool.

The MACD and the Relative Strength Index (RSI) indicators have continued falling in the past few weeks. Therefore, the most likely scenario is where the pair continues falling as sellers target the ultimate support level at 144.