USDJPY: Braced for BoJ & Fed combo

• USDJPY could see extreme volatility this week

• Over past year BoJ decision triggered moves of ↑ 1.1%

• Fed decision sparked moves of ↑ 0.6% & ↓ 1.3% over past year

• Bloomberg FX model: 77% USDJPY – (151.30 – 157.99)

• Key technical level – 155.00

A super central bank combo featuring the Bank of Japan (BoJ) and Federal Reserve (Fed) could rattle the USDJPY!

That’s right, markets are forecasting this to be one of the most volatile weeks for the currency pair this year.

After trending lower this month and touching levels not seen since early May 2024, a significant move could be on the horizon.

On the daily charts, a technical bounce seems to be taking place with prices lingering around resistance at 155.00.

This rebound may be the product of yen weakness as investors question whether the BoJ will hike rates tomorrow.

Nevertheless, this is a big week for the USDJPY with fresh trading opportunities on the horizon. 

This is what you need to keep an eye on.

   1) BoJ rate decision

Expectations are mixed over what actions the Bank of Japan will take this month.

Traders are currently pricing in a 50% probability that the BoJ hikes rates by 10bp in July.

Given how inflation and wage growth have picked up, this presents an argument for higher rates. However, the BoJ has a solid record of disappointing market expectations.

• The USDJPY may trade lower if the BOJ hikes interest rates and signals more hikes down the road.

• Should the central bank leave rates unchanged and sound more dovish than expected, this could push the USDJPY higher.

Golden nugget: Over the past year, the BoJ decision has only triggered upside moves on the USDJPY with prices rising as much as 1.1% a 6-hour window post-release.

  2) Fed rate decision

No changes to US interest rates are expected. However, much focus will be on the press conference which could offer fresh clues on future policy moves.

Traders have priced in a 25-basis point Fed cut by September with a 75% probability of another cut by November.

• The USDJPY may fall if the Fed strikes a dovish note and signals that rates will be cut in September.

• Should the Fed sound more hawkish than expected, the USDJPY could rise.

Golden nugget: Over the past year, the Fed decision has triggered upside moves of as much as 0.6% or declines of 1.3% in a 6-hour window post-release.

  3) Technical forces

Prices remain under pressure on the daily charts despite the recent rebound. Although the Relative Strength Index (RSI) is moving away from oversold conditions, prices are still below the 50 & 100-day SMA.  

• A solid breakout and daily close above 155.00 may open a path toward the 100-day SMA at 155.60, 157.00 and 157.80.

• Should 155.00 prove reliable resistance, this could send prices towards 153.70, 153.00 and the 200-day SMA at 151.70.

Bloomberg’s FX model points to a 74% chance that USDJPY will trade within the 151.30 – 157.99 range over the next one-week period.