Japanese Yen Forecast: USD/JPY Slips as Traders Reconsider a BOJ Hike in December

USD/JPY Key Points

• BOJ Governor Ueda characterized the outcome of next month’s monetary policy meeting as “unpredictable,” re-opening the door for a potential interest rate hike.
• Traders are now pricing in 50/50 odds for both a BOJ rate hike and a Fed rate cut in December, setting USD/JPY up for volatility around key economic reports.
• A close near/below the 154.00 handle would increase the probability of USD/JPY accelerating its drop heading into next week.

Sometimes, the market just gets too far ahead of itself.

After a series of mixed economic data releases and noncommittal BOJ press conferences, traders were starting to assume that the Bank of Japan would avoid raising interest rates at its meeting next month…but as my Dad would say, we all know what happens when you assume.

Markets got a wakeup call in today’s Asian session when BOJ Governor Ueda characterized the outcome of next month’s meeting as “unpredictable.” He went on to stress that, "there is still a month to go, and a huge amount of data will be available by then. At each meeting, we will make a decision based on data available by then.” While arguably not much different than the message he has consistently conveyed since taking office, today’s speech served as a stark reminder that a rate hike was still on the table, drawing a sharp contrast with the rest of the developed world central banks, which are almost unanimously cutting or holding interest rates steady.

According to OIS traders, the BOJ is now seen as a coinflip for a 25bps rate hike in December (though its worth noting that the central bank may opt for a smaller 10-15bps increase as a “middle ground”) whereas a Fed interest rate cut is priced with similar odds for the week before Christmas. Depending on how the economic data comes out (specifically inflation and employment reports), USD/JPY traders could be looking at either a similar interest rate differential or a notably tighter one in four weeks’ time.

Japanese Yen Technical Analysis – USD/JPY Daily Chart

Source: TradingView, StoneX

As the chart above shows, USD/JPY has been trending consistently higher within a bullish channel since bottoming in mid-September, though that channel may be vulnerable to a breakdown as we go to press. USD/JPY carved out a potential “lower high” yesterday for the first time since the medium-term uptrend began, and a close near/below the 154.00 handle would increase the probability of a move lower heading into next week.

One indicator that readers may want to watch is the 14-day RSI, which has formed its own sideways range over the past seven weeks. If that momentum oscillator starts to break down, it could either lead or (more likely) confirm a breakdown in the exchange rate itself. In that scenario, the logical downside target would be near the confluence of previous support and the 200-day MA in the 151.50-152.00 zone.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX