The USD/JPY pair has been experiencing volatility, with its next move heavily dependent on the actions of the US Federal Reserve. According to Thanos Vamvakidis, Global Head of G-10 FX Strategy at Bank of America Merril Lynch (BofA), the Fed’s decision on rate cuts will play a crucial role in determining the direction of USD/JPY. Vamvakidis suggests that if the Fed decides not to cut rates, the pair could rally to 160.000, but if they do cut rates, it could fall to 142.000.
If the Fed decides to cut rates in line with current expectations, it is likely to put downward pressure on USD/JPY. This is because lower interest rates would reduce the advantage of holding cash in USD compared to JPY in terms of interest earnings. However, recent stronger-than-expected US data has caused some Fed policy makers to reconsider their plans for rate cuts, leading to a more hawkish stance from Chairman Powell. This has resulted in market participants buying US Dollars, shifting the probability of a rate cut in June to just above 50%.
On the other hand, the Bank of Japan (BoJ) is not expected to play a significant role in influencing the USD/JPY pair. Vamvakidis suggests that the BoJ is unlikely to raise interest rates to combat rising inflation, as inflation is seen as a positive in the Japanese economy. Japan has a long history of deflation and is happy to see persistent inflation slightly above the target. Therefore, the BoJ is expected to maintain a cautious approach compared to other central banks.
Japanese authorities have expressed concerns about the weakening Yen and have indicated their readiness to intervene if the Yen depreciates further. A critical level for potential intervention is seen around 152, particularly if the Fed is expected to cut rates. However, Vamvakidis points out that even if intervention occurs, it is unlikely to be a long-term solution. Previous experiences with intervention have shown that it is more of a threat than an effective tool in controlling exchange rates. The authorities may create caution in the market, but ultimately, the future of USD/JPY will heavily rely on the Fed’s decisions.
The future of USD/JPY remains uncertain, with various factors such as Fed rate decisions, strong US data, and BoJ policies influencing its movements. Market participants will need to closely monitor these developments to anticipate potential changes in the pair’s direction. Ultimately, while intervention may create short-term fluctuations, the long-term trajectory of USD/JPY will be shaped by broader economic factors and central bank policies.