USD/JPY to Stage Larger Recovery on Hawkish Fed, Dovish BoJUSD/JPY to Stage Larger Recovery on Hawkish Fed, Dovish BoJ

Fundamental Forecast for Yen:Neutral

The near-term breakout in USD/JPY may gather pace next week should the Federal Open Market Committee (FOMC) along with the Bank of Japan (BoJ) highlight the deviating paths for monetary policy.

After removing the zero-interest rate policy in December, the Fed may largely retain an upbeat outlook for the world’s largest economy and look to implement additional rate-hikes in 2016 as the U.S. approaches ‘full-employment.’ With the Fed scheduled to release its updated forecasts at the March meeting, central bank officials may take additional steps to prepare households and businesses for higher borrowing-costs as Chair Janet Yellen remains confident in achieving the 2% inflation target over the policy horizon. However, the 2016 rotation may spur a dissent within the committee as St. Louis Fed President James Bullard, a central bank hawk, warns that the decline in energy prices may not be transitory and could impact the real economy. With the 4Q U.S. Gross Domestic Product (GDP) report anticipated to show the economy growing an annualized 0.8% following the 2.0 % expansion during the three-months through September, a shift in Fed rhetoric paired with signs of a slowing recovery may undermine the bullish sentiment surrounding the U.S. dollar as it drags on interest rate expectations.

In regards to the BoJ, the central bank is likely to relay a dovish tone as Governor Haruhiko Kuroda keeps the door open to further expand the asset-purchase program, but more of the same may heighten the appeal of the Japanese Yen as market participants scale back bets for additional monetary support. It seems as though the BoJ remains in no rush to expand its quantitative/qualitative easing (QQE) program as policy makers have opted to merely push back its forecast for achieving the inflation goal, and Japan’s Consumer Price Index (CPI) report may encourage the board to endorse a wait-and-see approach as the core-core rate of inflation is expected to hold steady at an annualized 0.9% in December.

With that said, market participants may scale back their bullish outlook for USD/JPY should the Fed show a greater willingness to retain its current policy throughout the first-half of 2016, while the BoJ talks down bets for an imminent expansion of its non-standard program. Indeed, the near-term rebound in the dollar-yen may gather pace ahead of the key event risks as it breaks out of the range carried over from the previous week, but the pair stands at risk of facing a further decline in 2016 should we see a material shift in the policy outlook.