Rabobank's Senior FX Strategist Jane Foley discusses how the Federal Reserve (Fed) and Bank of Japan (BoJ) decisions could shape USD/JPY, noting that Fed Chair Warsh’s stance on forward guidance adds uncertainty. Foley highlights recent JPY weakness versus the US Dollar (USD), BoJ’s cautious hiking pace, and stresses that a clearly hawkish BoJ stance and reduced Fed hike fears may be needed to support the Japanese Yen and reach their USD/JPY159 three‑month target.

Fed uncertainty and BoJ hawkish signals

"When the BoJ meets on Friday, it’s board will have the advantage of knowing the outcome of this week’s Fed policy meeting. This will be useful knowledge for Japanese policy makers since they face the disadvantage that the Fed meeting may have more impact on the USD/JPY exchange rate than their own."

"Neither RaboResearch nor economists’ surveys are pointing to a change in policy from the FOMC today. Market pricing, however, is more jittery with respect to the chances of a hike."

"In view of the softness with which the JPY has been trading in the year to date vs. the greenback, it is a fair assumption that an absence of hawkish signals from the BoJ this week could open the door from further upside pressure on USD/JPY."

"As a result, the BoJ will likely have to be clearly hawkish at this week’s policy meeting to prevent the JPY from losing ground. Last week Bloomberg reported that the BoJ was open to hastening the pace of rate hikes."

"We admit that our forecast of a move to USD/JPY159 on a 3-month view currently looks optimistic since it would likely need various factors to come together. Not only would the market appreciate more reassurances on Japan’s fiscal front as well as hawkish signals from the BoJ, but a drop in Fed rate hike fears may also be necessary."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)