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The divergence in monetary policies of the Federal Reserve and the Bank of Japan provides insight into the path of usd/jpy At the same time, expectations of a Fed funds rate cut may be overly optimistic. Let’s discuss this topic and develop a trading plan.
The article covers the following topics:
Key points and highlights
- Reuters experts expect the Bank of Japan to raise interest rates in 2024.
- Futures markets expect the Fed to cut interest rates by 100 basis points.
- The divergence in monetary policy helps the USD/JPY pair determine the direction.
- The pair is likely to collapse to 139 and 133.5 in three months.
JPY Quarterly Fundamental Forecast
The Bank of Japan’s decision to raise overnight interest rates again before the end of the year is unlikely to have a major impact on usd/jpy Meanwhile, the US dollar is likely to fall if the Fed decides to ease monetary policy. Moreover, the derivatives market is indicating that the US central bank will adopt an aggressive approach, with a 65% probability of a 100 basis point cut in the federal funds rate in 2024. The yen has benefited from the divergence, which has contributed to its attractiveness.
Japan’s latest inflation data has left two different impressions. Consumer prices rose from 2.6% to 2.7% in July, marking 28 straight months above target. At the same time, core inflation fell below 2% for the first time since 2022, prompting dovish and centrist hawks to call for caution. Kazuo Ueda stresses that if the economic and inflation outlook is in line with the Bank of Japan’s expectations, monetary policy adjustment will continue.
Japan CPI Change
Source: Bloomberg.
According to a recent Reuters poll, 31 out of 54 experts, or 57%, expect the Bank of Japan to raise its overnight interest rate by 25 basis points to 0.5% in 2024. Two-thirds of respondents expect this to happen in December, with about a third of experts pointing to October as a likely timeframe. According to Jupiter Asset Management, Japan’s borrowing costs will reach 1% by 2025, the spread with the United States will narrow, and short-term interest rates will rise to 1% by 2025. usd/jpy The pair will drop to 130.
US dollar to Japanese yen exchange rate
Source: Bloomberg.
This forecast is in line with market expectations for a 100 basis point cut in the federal funds rate in 2024 and another 120 basis point cut in 2025. In a recent statement, Fed Chairman Jerome Powell indicated that the central bank does not support further cooling of the labor market and that it is time to adjust monetary policy.
Meanwhile, usd/jpy Bulls are not getting any support from the rapid rise in US stock indices. This is usually seen as an improvement in global risk appetite, leading to the yen being sold as a funding currency in carry trades. However, in the wake of Black Monday, speculators are likely to be cautious before dumping Japan’s currency. According to Citi, the US dollar has taken on a more prominent role in the global carry trade scene, with the yen now being sold against developing country currencies.
Quarterly Trading Plan for USD/JPY
Market expectations of a Fed rate cut in 2024 are overblown. Such aggressive monetary expansion by the Fed would require a recession in the US economy, which is unlikely to happen. A gradual change in market expectations would lead to a return of interest in the dollar. In the meantime, the US dollar would weaken. usd/jpy The downtrend continues, so pullbacks should be used to build short positions, adding to open positions at 147.2. Targets are at 139 and 133.5.
USD/JPY Real Time Price Chart
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