empty
01.02.2023 10:03 AM
USD/JPY at crossroads

This image is no longer relevant

Today is a very important day for the US currency. The Federal Reserve is expected to hike interest rates once again and determine the trajectory of its further tightening. This trajectory will determine the US dollar's future performance.

The US dollar has dominated the FX market throughout 2022, driven upwards by the Fed's hawkish policies. However, its happy times have come to an end.

USD has been struggling over the past 4 months, sliding down against all major currencies, particularly the Japanese yen. Since October, USD/JPY fell by more than 14%.

This image is no longer relevant

It is obvious that USD/JPY is no longer the best performing dollar pair in the market. Now, its position is under threat as the US dollar's troubled situation deteriorates.

USD/JPY is currently experiencing pressure from two sides. Firstly, traders are concerned about the possibility of an unexpected policy shift by the ultra-dovish Bank of Japan. And secondly, the market expects the Fed to adopt a less hawkish stance.

The first scenario is only a rumor and speculation, but the second one is already quite real. Earlier in December, the US central bank ended its series of four successive 75 bps rate hikes and increased the rate by only half a percentage point.

Now most investors are leaning towards the Fed slowing the pace of tightening again in February and raising interest rates by 25 bps.

Many analysts believe that the market has already fully priced in this risk. Therefore, another smaller rate hike should not affect the dollar too drastically.

In fact, some experts believe that even a 25 bps move will help the greenback to rise against some currencies, such as the Japanese yen.

Any Fed monetary tightening would widen the already huge interest rate gap between the US and Japan. Currently, the gap is more than 4 percentage points.

The dollar may jump against the yen right after the Fed announces its policy decision, but its further trajectory will largely depend on the rhetoric of Fed Chairman Jerome Powell.

Today, traders will focus on the Fed chairman's press conference, trying to find clues about how long the regulator intends to keep its hawkish stance.

If he maintains his message about the persistence of inflation and the need to keep interest rates higher for a longer period of time than expected by the market, it should support the US dollar.

However, there is also another scenario. If Powell's speech focuses not on inflation but on an approaching recession, it is likely to weaken any hawkish expectations of traders, pushing all US dollar pairs down, including USD/JPY.

Given the cooler US inflation data and statistic data that are signaling a continued slowdown in US economic activity, the second scenario might seem more likely. However, that is not quite the case.

Some analysts believe that Jerome Powell will only give vague hints regarding the Fed's future policy and will not make any definite promises.

"There are some reasons to believe that Powell and his team may aim to lengthen the hike cycle to buy time to assess both incoming data and the impact of their previous aggressive rate hikes," analysts at Saxo Markets noted.

The future performance of the US dollar will depend on the market's interpretation of the Fed's plans. If investors see them as hawkish, USD/JPY will rally, and if they perceive them as more dovish, it could drop sharply.

In any case, USD/JPY will finally break the two-week deadlock and take a definite path - either up or down.

Аlena Ivannitskaya,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

Netflix Wins Over Investors: What's Driving the Stock's Rapid Rise?

Stock markets rose on Wednesday, helped by U.S. President Donald Trump's ambitious initiatives and impressive financial results from major corporations. However, uncertainty over new trade tariffs continued to weigh

Thomas Frank 12:17 2025-01-22 UTC+2

One Year, 19% Growth: How Trump Is Rewriting the Rules for Global Markets

Financial markets greeted Donald Trump's second inauguration with mixed emotions. On the one hand, shareholders were enthusiastic about the pro-business agenda he was pushing. On the other hand, the currency

Thomas Frank 07:56 2025-01-21 UTC+2

Trump. Season 2: Intrigue, rates and a cryptocurrency with his own name

The dollar continued to show resilience on Monday, while Asian stock markets expressed cautious optimism. Investors were tensely awaiting Donald Trump's first steps in his second term, and speculated that

Thomas Frank 07:40 2025-01-20 UTC+2

Markets under pressure: What do China GDP numbers and US unemployment mean?

Morgan Stanley rises after higher fourth-quarter profit UnitedHealth falls as no quarterly sales estimates are released Investors analyze retail sales, unemployment data Indices fall: Dow 0.16%, S&P 0.21%, Nasdaq 0.89%

Thomas Frank 09:31 2025-01-17 UTC+2

Earnings Season and Global Rates: Asia Rejoices, Dollar Loses

Asian Stocks Rise, Fueled by Tech Yen Rises to One-Month High on Rising Rate Hike Bets Dollar Weakens as Cool U.S. Inflation Rekindles Rate Cut Hopes U.S. Earnings Open with

Thomas Frank 10:39 2025-01-16 UTC+2

Why the Dow and S&P 500 are growing, while the Nasdaq is stalling: detail analytics

US producer prices rose moderately in December Boeing fell after a report of low aircraft deliveries in 2024 Eli Lilly fell after a weak forecast for sales of a weight-loss

Thomas Frank 07:45 2025-01-15 UTC+2

Why Tighter AI Chip Regulation Is Spooking the Market, While Insurance Companies Are Cheering Investors

Moderna Slips After Cutting 2025 Sales Forecast Chip Stocks Fall as U.S. Tightens Controls on AI Chip Flows Health Insurers Rise as U.S. Proposes 2026 Payout Rates Indices

Thomas Frank 10:57 2025-01-14 UTC+2

Walgreens on the Rise: Best Day Since 1980 as Other Giants Sink

US Jobs Growth Beats Expectations in December S&P 500 Futures Fall Ahead of US CPI, Earnings Walgreens Set for Best Day Since 1980 After Beating First-Quarter Profit Constellation Brands Slips

Thomas Frank 06:28 2025-01-13 UTC+2

Nikkei and U.S. Futures Sink Quietly: Where to Look for Resilience

U.S. Stock Futures Fall After the Close Nikkei Down 0.9%, Chinese Bond Yields Rise U.S. Payrolls Data Crucial for Bond Market Dollar Surges Near 2-Year Highs, Rising for 6th Week

Thomas Frank 10:18 2025-01-10 UTC+2

Fed signals price risk: Should we expect a new round of inflation?

US private sector job growth slows in December - ADP Fed meeting minutes show growing risk of price pressure Quantum computing stocks fall as Nvidia CEO sees long road ahead

Thomas Frank 07:20 2025-01-09 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.