Following the announcement from the Bank of Japan (BoJ), the Japanese Yen (JPY) notably lagged behind. Analysts at MUFG Bank assess the outlook for USD/JPY ahead of the Federal Open Market Committee (FOMC) meeting.
FOMC communication will be key for JPY
The primary risk, as we assess it, lies in the possibility of the Federal Open Market Committee (FOMC) reducing its median dot projection for interest rate moves this year from three rate cuts to just two. Such an adjustment would likely prompt an increase in yields and provide support for the Dollar. However, the Overnight Index Swap (OIS) market does not significantly deviate from this scenario, pricing in around 20 basis points of additional cuts.
Therefore, the magnitude of the impact on yields and the Dollar is more likely to stem from the accompanying communication from Fed Chair Powell rather than solely the adjustment in the dots profile. We anticipate a fairly balanced communication from the Fed, regardless of whether the median dots profile changes for this year. This should help limit further USD appreciation and weaken the current positive momentum, especially if the dots profile remains unchanged.
However, if our assessment is incorrect and the Fed delivers a hawkish communication, it could lead to a notable FX market reaction. Such a scenario might test Tokyo’s resolve to limit Yen depreciation, particularly considering the absence of trading due to a Tokyo holiday. A breach of the 2023 high becomes a distinct possibility in this scenario. While Tokyo may initially accept such a breach, intervention is likely to occur soon after, especially given the recent actions by the Bank of Japan (BoJ), which now align with Yen buying intervention.
