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USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

David Song, Strategist
USDJPY Stands at 2015 High With Fed and BoJ Policy in the Forefront

Fundamental Forecast for Euro:Neutral

The near-term breakout in USD/JPY raises the risk for a run at the 2015 high (122.01), but the fundamental developments coming out of the world’s largest economy may undermine the bullish outlook surrounding the exchange rate should we see a growing number of Fed officials show a greater willingness to further delay the normalization cycle.

Speculation surrounding the Fed policy outlook may play an increased role in driving dollar-yen volatility as the Bank of Japan (BoJ) preserves a wait-and-see approach, and another series of dismal U.S. data prints may drag on interest expectations as the Federal Open Market Committee (FOMC) Minutes show a greater willingness to retain the zero-interest rate policy (ZIRP) beyond mid-2015. The preliminary 1Q U.S. Gross Domestic Product (GDP) report will be in focus going into the last full-week of May, and the updated print may dampen the appeal of the greenback as market participants anticipate a 0.9% contraction in the growth rate versus an initial forecast for a 0.2% expansion.

A marked downward revision in 1Q GDP may encourage the Fed to retain the ZIRP for an extended period of time, and we may see a growing number of central bank officials adopt a more dovish tone should the weakness from the beginning of the year carry into coming quarters. With FOMC voting-members Stanley Fischer, Jeffrey Lacker and John Williams scheduled to speak next week, the fresh batch of rhetoric may ultimately spur a near-term pullback in USD/JPY should the policymakers talk down bets for a September rate hike.

Nevertheless, the technical outlook highlights the risk for a test of the 2015 high as USD/JPY breaks out of the near-term range, and a more bullish formation may take shape in the days ahead should the U.S. developments highlight an improved outlook for the U.S. economy and beat market expectations.

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