Home Forex Market Analysis USDJPY Forecast as the BOJ and Fed Divergence Widens

USDJPY Forecast as the BOJ and Fed Divergence Widens

USDJPY Forecast as the BOJ and Fed Divergence Widens

The USDJPY price moved upwards on Tuesday morning after the January interest rate decision by the Bank of Japan (BOJ). The pair rose to a weekly high of 115, which was about 1.30% above the lowest level in January.

Bank of Japan decision

The BOJ concluded its two-day monetary policy meeting on Tuesday. In its statement, the bank decided to leave its pandemic response tools unchanged, as most analysts were expecting.

It left its main interest rate unchanged at -0.10%, where it has been in the past few years. At the same time, the bank decided to continue with its asset purchases program. 

It will continue buying exchange-traded funds (ETFs) worth about 12 trillion yen and Japan Real Estate Investment Trust worth about 180 billion yen. The BOJ believes that these asset purchases are important in a time when the economy is in a recovery mode.

Most importantly, the bank decided to continue with its yield curve control. In this program, the bank is targeting the country’s 10-year bond yields at around zero percent. By so doing, the program is ensuring that the country’s government has cheap access to funds.

BOJ inflation risks

The USDJPY pair rose partly because the decision had a small change. In it, the bank said that there were elevated risks that inflation will likely keep rising. It was the first time that the BOJ has warned about inflation risks since 2014.

In the past few years, Japan has defied the so-called Philips Curve. In economics, the curve states that inflation will often rise when the unemployment rate falls. In Japan, the unemployment rate is below 3% while inflation remains below 1%. 

Analysts cite several reasons for this. For example, unlike the United States, Japan has a relatively aging population. In most countries, it is the young people who lead in consumer spending.

Further, the Japanese are highly price-sensitive. As such, many sellers are often afraid of raising prices because they fear losing customers.

BOJ and Fed divergence

The USDJPY pair rose because the BOJ decision was viewed to be a bit dovish. Unlike other leading central banks, the bank did not hint at future rate hikes or the end to quantitative easing.

The Fed has embraced a relatively hawkish stance because of the surging inflation rate. In last week’s testimony, Jerome Powell warned that the bank could be forced to implement three or more rate hikes this year. 

Other central bank officials also hinted that they will hike rates several times and then end the quantitative easing policy.

Therefore, the USDJPY pair tilted upwards because the two banks were now moving in separate directions. The BOJ still has a long way to go to change its decision.

The next key catalysts for the USDJPY price will be US housing data. The country will publish the latest building permits, and housing starts data on Wednesday. It will also publish the latest existing-home sales data on Thursday.

USDJPY forecast

The four-hour chart reveals that the USDJPY was in a bullish trend before the BOJ made its interest rate decision. The decision helped to push the pair significantly higher. It has moved above the 25-day and 50-day moving averages. The pair also rose above the 38.2% Fibonacci retracement level, while the MACD has formed a bullish crossover. 

Therefore, the pair will likely keep rising as investors target the key resistance level at 116. This view will be invalidated if the price drops below 114.50.

USDJPY 4-hour chart


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