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USD/JPY Rate Outlook Hinges on Federal Reserve Interest Rate Decision

USD/JPY Rate Outlook Hinges on Federal Reserve Interest Rate Decision

David Song, Strategist
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Japanese Yen Talking Points

USD/JPY approaches the monthly low (113.38) amid the selloff in global equity prices, but the Federal Reserve interest rate decision may sway the near-term outlook for the exchange rate as the central bank prepares to normalize monetary policy.

Fundamental Forecast for Japanese Yen: Neutral

Swings in risk appetite may influence USD/JPY throughout the Fed’s blackout period as it failed to track the recent rise in longer-dated US Treasury yield, and the Japanese Yen may continue to benefit from the shift in investor confidence as the Bank of Japan (BoJ) sticks to its easing cycle.

USD/JPY Rate Outlook Hinges on Federal Reserve Interest Rate Decision

However, the Federal Open Market Committee (FOMC) rate decision on January 26 may prop up USD/JPY as the central bank plans to implement higher interest rates over the coming months, and the Fed may reveal a more detailed exit strategy as Governor Lael Brainard discloses that “we started to discuss shrinking out balance sheet” while testifying in front of US lawmakers.

USD/JPY Rate Outlook Hinges on Federal Reserve Interest Rate Decision

Source: CME

In turn, USD/JPY may exhibit a bullish trend in 2022 as the CME FedWatch Tool reflects a greater than 90% probability for a 25bp rate hike in March, and the decline from the monthly high (116.35) may turn out to be a correction in the broader trend amid the diverging paths between the BoJ and FOMC.

With that said, a further decline in global equity prices may keep USD/JPY under pressure over the coming days, but the Fed rate decision may prop up the exchange rate as the central bank plans to normalize monetary policy this year.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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