USD/JPY rate outlook vulnerable to dovish Fed rate hike

USD/JPY Outlook

USD/JPY rallies to a fresh monthly high (136.56) as the Bank of Japan (BoJ) sticks to Quantitative and Qualitative Easing (QQE) with Yield Curve Control (YCC), and the upcoming Federal Reserve interest rate decision may keep the exchange rate afloat as the central bank is expected to deliver another 25bp rate hike.

USD/JPY rate outlook vulnerable to dovish Fed rate hike

USD/JPY clears the series of lower highs and lows from the start of the week as the BoJ plans to ‘patiently continue with monetary easing,’ and the exchange rate may track the positive slope in the 50-Day SMA (133.81) amid the diverging paths for monetary policy.

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FOREX.com Economic Calendar

The Federal Open Market Committee (FOMC) is anticipated to increase the Fed Funds rate to a fresh threshold of 5.00% to 5.25% on May 3, and it remains to be seen if the central bank will pursue a more restrictive policy as the update to the 1Q Gross Domestic Product (GDP) report points to persistent inflation.

As a result, USD/JPY may appreciate in May should the FOMC keep the door open to implement higher interest rates, but a dovish rate hike may produce headwinds for the Greenback amid bets for a looming change in regime.

Source: CME

The CME FedWatch Tool continues to reflect speculation for lower US interest rates ahead of 2024 as market participants see a greater than 70% probability for a Fed Funds rate of 4.50% to 4.75% at the last interest rate decision for this year.

In turn, a shift in the forward guidance for monetary policy may fuel expectations for a U-turn Fed policy as Chairman Jerome Powell and Co. acknowledge that ‘some additional policy firming may be appropriate,’ and USD/JPY may struggle to retain the advance from the monthly low (130.63) if the FOMC shows a greater willingness to reverse the hiking-cycle later this year.

With that said, another Fed rate hike may prop up USD/JPY as the BoJ remains in no rush to switch gears, but a material adjustment in the FOMC’s forward guidance may drag on the Greenback amid speculation for a looming change in regime.

Japanese Yen Price Chart – USD/JPY Daily

Chart Prepared by David Song, Strategist; USD/JPY on TradingView

• USD/JPY rallies to a fresh monthly high (136.56) after bouncing along the 50-Day SMA (133.81), and the exchange rate may track the positive slope in the moving average as it continues to retrace the decline from the yearly high (137.91).
• A close above the 136.00 (23.6% Fibonacci extension) handle may lead to a test of the 200-Day SMA (136.99), with a move above the long-term moving average raising the scope for a run at the March high (137.91).
• Next area of interest comes in around the December 2022 high (138.18) followed by the 138.70 (78.6% Fibonacci extension) area, but failure to hold above the 136.00 (23.6% Fibonacci extension) handle may keep USD/JPY within the March range.
• Will keep an eye on the Relative Strength Index (RSI) as it approaches overbought territory, and it remains to be seen if the oscillator will mirror the price action from last month amid the failed attempts to push above 70.

Additional Resources:

AUD/USD tumbles toward March low following 'Death Cross' formation

EUR/USD forecast: April 2022 high back on radar

--- Written by David Song, Strategist