USD/JPY Analysis: Potential for Further Upside, But Caution Prevails

The recent developments in the US Federal Reserve and the Bank of Japan have put USD/JPY in the spotlight. While the pair is extending its gains, aiming to surpass the November 2022 high, there are factors to consider that suggest caution might be wise.

US Fed’s Hawkish Stance:

Last Wednesday, the US Federal Reserve made a significant announcement. While they paused their tightening cycle, they maintained a hawkish bias. Most officials still see room for one more rate hike this year, indicating a commitment to reaching peak rates. In addition, they adjusted their 2024 median rate projection to 5.1%, a sign of a potentially tighter policy path and fewer cuts next year compared to previous estimates.

Bank of Japan’s Dovish Stance:

In contrast, the Bank of Japan (BoJ) took a different approach. They chose to keep their ultra-accommodative settings unchanged. The BoJ’s policymakers reiterated their pledge to “patiently continue with monetary easing” and to take further action if necessary to achieve the elusive 2% inflation target in a sustainable manner. Governor Ueda reaffirmed this dovish message, emphasizing that the inflation goal remains unattained despite elevated inflation levels. As a result, they are committed to maintaining monetary easing and yield curve control.

The Ongoing Monetary Policy Divergence:

The current monetary policy divergence between the US Federal Reserve and the Bank of Japan has been favoring USD/JPY. However, it’s essential to recognize that this dynamic may not last indefinitely. BoJ Governor Ueda has recently hinted at the eventual end of sub-zero rates, while the Fed may already be close to reaching its terminal rate. The impending shift or anticipation of such a shift has the potential to lead to significant repricing in the currency pair.

USD/JPY’s Ascent:

USD/JPY is on an upward trajectory in the aftermath of the Fed and BoJ announcements, with its sights set on surpassing the October 2022 high of 151.86. Achieving this milestone could open the door to multi-decade highs once more. However, there are reasons to exercise caution at this stage.

Verbal Support and FX Intervention:

Verbal support for the Yen and the possibility of FX intervention by authorities could serve as limiting factors for further upside in USD/JPY. As the pair’s rally continues, there’s a growing sense that the move might be overextended. While it’s conceivable that a pullback could occur, it would likely require a strong catalyst for the pair to test the next important horizontal support at the 145 zone.

In conclusion, USD/JPY’s current upward momentum is driven by the monetary policy divergence between the US Fed and the Bank of Japan. While the potential for further gains exists, traders and investors should remain cautious, considering the verbal support for the Yen and the potential for FX intervention. Additionally, the dynamics in the currency pair may be approaching a point of change, emphasizing the importance of vigilance in the coming weeks.