The last week of July was action-packed for USD/JPY: both the Federal Reserve and the Bank of Japan made statements regarding the rise of interest rates. It gets even more interesting, considering that the regulators are leading polar monetary policies. Let’s take a closer look at both meetings and how they affected the currency pair.
The Fed was the first to go, raising the interest rates by a quarter of percentage to 5.25 - 5.5%. This was expected – and was the highest in 22 years. The Chair, Jerome Powell, also said that no decisions on further increases were made but mentioned that the key rate might rise in September. Generally, the regulator plans to set the rate level depending on incoming macro data. For now, June consumer inflation statistics were positive. The economy grew by 2.4%, which was more than expected, and the recession in 2023 predicted by experts isn’t likely to happen this year.
Speaking of what was expected, the BoJ maintained interest rates at -0.1% and raised its inflation forecast for 2023 from 1.8% to 2.5%. What shocked investors, however, was a change in monetary policy settings. The Bank of Japan intends to keep control of the bond yield curve in the same +/-0.5 percent range but will allow debt market rates to move beyond it. This means that Governor Kazuo Ueda turned rigid yield curve targeting into flexible targeting. The central bank will consider the previously set range as a benchmark, not a mandatory range. The regulator offered to buy 10-year bonds at a rate of 1% instead of 0.5%, signaling that the previous framework was a thing of the past.
The market reacted immediately with an uptrend for USD/JPY. Correction followed though it is unlikely to last long. Monetary stimulus, low interest rate and strong dollar will probably lead to a return to a rising trend. As of writing, the pair is trading around 142.32 points. The medium-term target for its move could be 145.00 points. The US Dollar Index also recovered quickly after falling near 100.60, further bolstering the pair's strength.
This article was written in cooperation with TradingView