The FOMC hiked the Fed Funds rate last week by 50bps to bring the overnight rate to 4.5%. In addition, the Fed’s Summary of Economic Projections (SEPs) showed that most members believe the terminal rate for interest rates during this hiking cycle will be 5.1% in 2023, up from 4.6% in September’s projections. The bond market immediately moved to price in this new forecast, as traders previously foresaw the terminal rate lower. The Fed also said that the SEPs do not show a rate cut in 2023. Members said they will cut rates when they are confident inflation is moving towards its 2% target. The US also released a number of economic data points last week which showed that the country could be on its way towards a recession. Retail Sales, the Philadelphia Fed Manufacturing Index, the NY Empire State Manufacturing Index, Industrial Production and the first look at the S&P Global Manufacturing PMI were all weaker than expected and weaker than the previous reading. The US economy could be in for trouble ahead if growth slows while the Fed is still hiking interest rates next year.
The Bank of Japan meets on Tuesday this week to discuss interest rate policy. The BOJ is expected to leave rates unchanged at -0.1% while maintaining its cap on the 10-year JGB at 0.25%. Inflation increased to 3.7% YoY in October; however, the BOJ has been reiterating that inflation is likely to drop in the near future, and therefore, it will take additional measures if needed to ensure an easing policy stance. Japan’s next CPI reading is due out on Friday, and expectations are for the headline rate to increase to 3.8% YoY vs 3.7% prior. The core rate is expected to increase to 3.8% YoY vs 3.6% YoY in October. Watch for a change in the statement language due to the rise in inflation. In addition, over the weekend, PM Kishida said that he will discuss revising the 10-year old joint statement with the BOJ that says the BOJ will achieve 2% inflation “at its earliest possible date” after BOJ Governor Kuroda’s term ends in April. However, any kind of reference at the BOJ meeting could offer some volatility in Yen pairs.
On a daily timeframe, USD/JPY made an aggressive move higher beginning March 11th when it became apparent that inflation wasn’t as transitory as the Federal Reserve initially thought, and it was clear that the Fed would begin raising rates. USD/JPY moved higher in an orderly channel until October 21st, when the pair moved above the channel and made a high print for the year at 151.94. On that same date, the MOF intervened in the fx market for the second time, pushing USD/JPY back into the channel, making a daily low of 146.16. Since then, the pair has been moving in a downward sloping orderly channel and is currently hovering just above the 200 Day Moving Average and an upward sloping trendline from December 2nd near 137.00.
On a 240-minute timeframe, if the pair does continue to move lower, the first support is at trendline dating to December 2nd, near 135.00. Below there, USD/JPY can fall to the December 2nd lows at 133.62 then the 50% retracement from the lows of March 4th to the highs of October 21st at 133.30. However, if USD/JPY moves higher, resistance is at the long-term downward sloping trendline dating to October 21st near 137.50, then the highs from December 15th at 138.13. If the pair moves above there, the next resistance level is the highs from November 30th at 139.89.
The FOMC meeting last week was hawkish, with an estimated 75bps of rate hikes still to come. However, the BOJ has been extremely dovish for 10 years! Could that change at the BoJ’s meeting on Tuesday? If the Bank of Japan mentions any type of future shift in policy stance, USD/JPY may be headed lower!
