• USD/JPY has risen sharply this yr, however it might have topped out amid peak Fed hawkishness
  • Rapidly slowing U.S. economic system exercise could pave the method for a financial coverage pivot later this yr if inflationary pressures start to average shortly
  • The Federal Reserve is predicted to lift charges by 75 foundation factors subsequent Wednesday, however the transfer has been discounted already

Most Read: US Business Activity Shrinks, Heightening Recession Fears, July Composite PMI at 47.5

The Japanese Yen has depreciated sharply in opposition to the U.S. greenback in 2022, with USD/JPY up about 18% to ranges not seen in additional than 20 years throughout this era. This transfer has been a operate of broad-based U.S. greenback energy, however the Bank of Japan’s ultra-loose accommodative stance additionally bears a lot of the accountability.

This begs the query: will the present bullish USD/JPY pattern persist?

From the yen’s facet of the equation, there aren’t a number of constructive drivers in the close totime period. On the financial coverage entrance, the Bank of Japan has renewed its dedication to a dovish technique at its most up-to-date assembly, indicating that it has “absolutely no plans” to lift rates of interest regardless of constructing inflationary pressures. Japanese authorities are clearly prioritizing development over inflation considerations, signaling that the established order is prone to prevail this yr earlier than a tentative shift in 2023. This means there isn’t any help for the yen from the home central financial institution.

Looking at the different facet of the coin, the Federal Reserve’s forceful tightening cycle has been maybe the major supply of energy for the U.S. greenback, however it’s potential we now have reached peak hawkishness. While the FOMC is predicted to lift borrowing prices by 75 foundation factors to 2.25%-2.50% subsequent Wednesday and ship a couple of extra hikes this yr to deal with four-decade excessive CPI readings, these strikes are already priced in the curve. What isn’t totally discounted, nonetheless, is a “policy pivot” that would happen in the fall or winter.

The fast slowdown in U.S. enterprise exercise seen in latest information, akin to in the companies sector, is elevating the dangers of a recession, a state of affairs that would lead policymakers to undertake a much less aggressive stance to keep away from extreme and painful financial injury, particularly if inflation begins to ease in the coming months.

With commodities, together with oil and gasoline, having fallen sharply in latest weeks, worth pressures ought to quickly average in the U.S. economic system, giving the Fed a chance to desert its ultra-aggressive stance later this yr. As merchants put together for this risk, the U.S. greenback might begin to head decrease, paving the method for a downward correction in USD/JPY.


USD/JPY Chart Prepared Using TradingView


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—Written by Diego Colman, Market Strategist for DailyFX

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