USD/JPY extends its recovery above 154.70 with central banks on focus
- The Dollar appreciates against the Yen unfazed by the diverging Fed/BoJ policy outlook.
- The BoJ is expected to launch an aggressive quantitative tightening program on Wednesday.
- USD/JPY has breached 154.80 and might extend beyond 155.35 to the 155.75 area.
The USD/JPY seems to ignore the diverging policy outlook of its respective central banks and is gaining bullish traction, ahead of BoJ and Fed’s monetary policy decisions, on Wednesday.
Fed and BoJ are about to advance on diverging paths
The Federal Reserve is widely expected to leave its benchmark interest rate unchanged, although recent data has boosted hopes that they might anticipate their easing cycle. The market is fully pricing a rate cut in September, and Chair Powell’s comments will be analyzed with interest for hints on that direction.
Later today, the US JOLTS job opening and the Conference Board’s Consumer Sentiment Index are expected to add to the evidence of softer US economic growth in the second quarter.
The BoJ, on the other hand, is in an antithetical situation. The Bank will disclose a significant reduction of its massive bond purchasing program and probably accompany it with a 10 bp rate hike.
USD/JPY has gained bullish momentum above 154.70
Technically speaking, the pair is gaining momentum after breaching Friday’s high, at 154.70 with bulls aiming for the resistance area between the 4H 50 SMA, now at 155.35, and the 38.6% Fibonacci retracement of July’s reversal, at 155.75. Supports are 153.00 and 151.90.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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