- High interest rates could lead to new cracks in the US labor market.
- US inflation is likely to sustainably reach the 2% target.
- The BoJ will continue to tighten monetary policy.
The USD/JPI outlook paints a pessimistic picture as the dollar falls after Powell’s strong dovish tone. Meanwhile, the yen rallied after BoJ Governor Kazuo Ueda said the central bank would raise rates if inflation rose as expected.
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Policy outlooks in Japan and the US diverged again. However, this time it is in favor of the yen. Minutes from the FOMC meeting last week revealed that policymakers are ready to start cutting interest rates. However, Powell’s tone on Friday was more dovish and his guidance clearer.
According to him, inflation is likely to sustainably reach the 2% target. Meanwhile, high interest rates could lead to new cracks in the labor market. Therefore, it is time for the Fed to adjust its policy. A reversal from high interest rates to a rate cut is likely to mean a weaker dollar. At the same time, there will be less incentive to hold high-yielding US assets when the Fed starts cutting rates. Therefore, this will lead to relaxation of the popular trade in the market, strengthening of the yen.
At the same time, the Bank of Japan is turning to a more hawkish outlook. Initially, there were fears that market turmoil after the first rate hike would put a pause on policy adjustments. However, BoJ Governor Kazuo Ueda dismissed these fears.
Ueda said that as long as inflation rises as expected, the central bank will continue to tighten monetary policy. Consequently, the yen will strengthen and the interest rate gap between Japan and the US will narrow.
USD/JPI Key Events Today
It will be a slow start to the week with no key events. Therefore, investors will continue to digest the policy remarks from Friday.
USD/JPI Technical Outlook: Bears target 142.56 amid rising momentum
From the technical side, USD/JPY the price finally fell, breaking away from the 30-SMA and the 0.382 Fib level. Therefore, the bearish bias has strengthened with the price well below the SMA and the RSI almost oversold.
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Bears are now moving towards the support level of 142.56. A break below this level will solidify the bearish bias and lead to lower prices. On the other hand, if the level holds, the price could pause or reverse.
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