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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,
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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.

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.

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.

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--- 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.