USD/JPY forecast: Japanese yen outlook as BoJ hints at faster rate hikes

The Japanese yen softened against the US dollar, even after the Bank of Japan (BoJ) flagged rising risks of faster interest rate hikes in the last meeting. The USD/JPY pair rose to 158.23, up by nearly 2% from its lowest level this month. 

BoJ signals potential faster interest rate hikes

There are signs that the BoJ is considering faster interest rate hikes to fill the gap with the Federal Reserve’s benchmark rate.

Minutes of the last meetings showed that officials were comfortable with higher rates for longer as inflation remained at an elevated level. The minutes said:

“Given that underlying CPI inflation has been approaching 2 percent and greater consideration should be given to upside risks to prices than before, it could be considered that the pace of policy interest rate hikes will be faster than market expectations.”

The BoJ left interest rates unchanged at 1% in the last meeting, its highest level since September 1995. It made the last 25 basis point hike in June, and now Polymarket traders believe that it will hike again later this year.

The most recent data showed that the headline consumer price index (CPI) jumped to 1.7% in June, the highest reading since December last year. This surge was driven by electricity and gas prices as government subsidies were scaled back.

Energy prices have jumped in Japan this year because of the ongoing US-Iran war that pushed Brent and West Texas Intermediate (WTI) prices to nearly $120 at the peak. Crude oil prices drifted higher on Monday as Iran announced tougher rules for reopening the Strait of Hormuz. It is seeking reparations, release of frozen assets, and the lifting of the naval blockade.

US and Japan interventions

The USD/JPY pair has risen recently as investors bought the dip after the recent interventions by the US and Japan. The BoJ has spent over $50 billion this month, while the US has swapped euros worth billions of dollars to Japanese yen. 

This happened as the US is concerned that Japan will be forced to dump some of its US treasuries to boost the yen, a notable thing since Japan holds over $1.1 trillion in bonds and the 30-year yields have remained above 5% for over a month.

It is common for a forex pair to bounce back after experiencing such a big drop that the USD/JPY had earlier this month.

The pair will next react to the upcoming US consumer price index (CPI) report that comes out on Wednesday. Economists expect the data to show that inflation slowed modestly in July as gas prices fell a bit. This report comes a few days after the US released the weak nonfarm payrolls (NFP) data, which showed that the economy lost 23k jobs last month.

USD/JPY technical analysis

USDJPY chart | Source: TradingView

The daily chart shows that the USD to JPY pair plunged from a high of 163.96 to a low of 155.20. It has now plunged below the 50-day Exponential Moving Average (EMA), a sign that bears are in control for now.

At the same time, the two lines of the Percentage Price Oscillator (PPO) have moved below the zero line and moved to the lowest level in months. The pair is also forming a bearish flag pattern, a common bearish continuation sign.

Therefore, the pair’s outlook is mixed for now. One aspect is where it resumes the downtrend as sellers attempts to retest this month’s low of 155.20. On the flip side, it may bounce back to the psychological level of 160.