USD/JPY forecast: signal ahead of BoJ and FOMC decision

The USD/JPY exchange rate could be on the verge of a big move after forming a symmetrical triangle ahead of the Federal Reserve and Bank of Japan (BoJ) interest rate decisions. The pair was trading at 144 on Monday, a few points above the year-to-date low of 139.95. 

BoJ interest rate decision

The USD/JPY pair will be in focus this week as the BoJ delivers its interest rate decision on Tuesday. 

This will be a notable meeting because it comes as Japan’s bond market faces major challenges. The ten-year yield recently peaked at 1.588%, where it formed a double-top pattern with a neckline at 1.06%. A double-top pattern points to more downside, which explains why the yield has pulled back to 1.45%.

Economists expect the Bank of Japan to leave interest rates unchanged at 0.50%, where they have been since January. It has already hiked interest rates three times, with the current level being the highest it has been in decades. 

The main reason why the bank will not cut interest rates is that the country’s economy is slowing as exports drop. A recent data showed that the Japanese economy remained in a technical recession in the first quarter as exports dropped. 

Hiking interest rates in a period when the economy is slowing is risky because they make it more expensive for individuals and companies to borrow.

At the same time, the BoJ is still dealing with high inflation in the country. Recent data showed that the core consumer price index (CPI) jumped to 3.5% in April from 3.2% in the previous month.

The headline consumer price index (CPI) also jumped to 3.6% as it moved further away from the bank’s target of 2.0%. 

While the BoJ will leave interest rates intact, it may also decide to taper its bond purchases at a slower pace. The bank intends to taper its bond purchases to reduce its footprint in the market. In a note, an analyst said:

“To carefully determine the appropriate pace of shrinking its balance sheet, the BOJ is likely to ease the pace in the reduction of bond purchases from next spring.”

Federal Reserve decision ahead

The USD/JPY exchange rate will also react to activity in the United States. First, the statistics agency will publish the latest retail sales, industrial, and manufacturing production data on Tuesday. These numbers will provide more color on the impact of tariffs on the economy. 

Second, the pair will react to the Federal Reserve interest rate decision on Wednesday. Economists expect the bank to leave rates unchanged as officials have signaled in the past few months. 

The bank’s officials are mostly concerned that Donald Trump’s tariffs will stimulate inflation. US inflation data released last week showed that the headline Consumer Price Index (CPI) rose from 2.3% in April to 2.4% in May. 

Therefore, the Fed decision will irk Trump, who has pressured Jerome Powell to cut interest rates by 1%. He believes that higher rates were putting the US at a disadvantage against Europe and China, where they remain at 2% and 3%, respectively. 

USD/JPY technical analysis

The daily chart shows that the USD/JPY exchange rate has been in a strong sell-off in the past few months as the US dollar index crash accelerated. It dropped from a high of 158.85 on January 10 to 144.25 today. 

The pair has remained below the 50-day and 25-day Exponential Moving Averages (EMA). Dropping below these averages is a sign that bears are in control for now.

The USD/JPY exchange rate has also formed a symmetrical triangle pattern whose two lines are about to converge. In most cases, this convergence often leads to a bullish or bearish breakout. 

Therefore, with the Fed and BoJ decisions coming up, there are odds that it will hav a breakout. The key support and resistance levels to watch are at 142 and 146. 

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