USD/JPY and EUR/JPY Forecasts Ahead of Fed, ECB and BoJ

Japanese Yen – USD/JPY and EUR/JPY Prices, Charts, and Analysis

• Bank of Japan expected to leave all policy levers untouched.
• EUR/JPY testing short-term trend support.

The Bank of Japan (BoJ) is expected to leave its ultra-accommodative monetary policy unchanged on Friday but its latest inflation forecasts may give a hint to the central bank’s future plans.

Central Bank Calendar

The BoJ is fully expected to leave its policy rate (-0.1%) untouched and maintain its yield curve control – (10 years at 0.5% above or below 0%) unchanged on Friday and will update its quarterly projections. Of note will be the central bank’s quarterly inflation forecasts which are expected to show consumer price inflation continuing to rise. If price pressures pick up further, or become sticky, the central bank may need to alter its current YCC levels to make sure higher inflation does not become entrenched.

Bank of Japan (BoJ) – Foreign Exchange Market Intervention

USD/JPY trades a fraction under 142.00, up around five big figures since July 14. The move in the last week reflects US dollar strength and attention now turns to Wednesday’s FOMC meeting where the Fed is expected to hike rates by 25 basis points. This move is already fully priced into the US dollar and traders will turn their attention to the post-decision press conference to see if Fed chair Jerome Powell gives any clues to the future path of US monetary policy. Markets are predicting that tomorrow’s rate hike will be the Fed’s last and that after a few months of consolidation, the next move in US interest rates will be lower. The CME Fed Fund Futures probabilities are pricing in a 25 bp rate cut in March next year. A slightly hawkish BoJ coupled with a mildly dovish Fed could send USD/JPY slipping back to 140.00 or lower in the short-to-medium term.

USD/JPY Daily Price Chart – July 25, 2023

USD/JPY Retail Sentiment is Mixed

Retail trader data shows 37.53% of traders are net-long with the ratio of traders short to long at 1.66 to 1.The number of traders net-long is 3.85% higher than yesterday and 24.02% lower than last week, while the number of traders net-short is 0.22% higher than yesterday and 16.91% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USD/JPY prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

EUR/JPY made a fresh 15-year high last Friday but sentiment has turned so far this week. The pair are now testing short-term channel support and a break below here could see further losses accrue. Support would likely start at 154.00 before the current July low and 50-day simple moving average come into play around 153.50. A heavier sell-off would bring 151.61 into play.

The latest ECB meeting on Thursday is expected to see the central bank lift rates by 25 basis points. There is a chance that the ECB hikes by half-a-percent but this is an outlier. Recent data points to ongoing weakness in the Germany and the Euro Area. Today’s PMI data suggest that the German economy will continue to contract in Q3, after falling into a recession in Q2, leaving the Euro Area on edge. The ECB will have to carefully balance about target inflation and a further economic slowdown when deciding on its next move.

EUR/JPY Daily Price Chart – July 25, 2023

What is your view on the Japanese Yen – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.