USD/JPY traders are now focused on next week's policy meetings of the Federal Reserve and the Bank of Japan. The pair has experienced significant fluctuations amid uncertainty in the market.
There and back again
This week has been a rollercoaster ride for USD/JPY. Unexpectedly hot US inflation data has sent the pair skyward on Tuesday.
US CPI data has indicated that despite aggressive Fed monetary policy, consumer price growth in the US has remained steady. Inflation decrease in August fell short of market expectations.
This data has reinforced expectations of a strong Fed rate hike. Some traders are now even predicting a 100 basis point hike in September.
The US regulator could tighten its policy even further, while its Japanese counterpart continues to follow an ultradovish course. This situation has given strong support to the US dollar.
Following the release of US inflation data, USD/JPY jumped by more than 1% in several hours and approached the key level of 145.
Many analysts believe that this level is the red line for Japanese officials, who have repeatedly warned about a possible currency intervention every time the yen has approached it.
This week was no exception. The rhetoric of Japanese officials and the rate check conducted by the Bank of Japan on Wednesday has strongly increased intervention risks. This helped JPY to recover slightly against USD.
During today's Asian session, the Japanese yen found additional support in statements by Japan's finance minister Shunichi Suzuki. The finance minister expressed his concern over the recent drop of the Japanese national currency.
"If such moves persist, the authorities would take necessary action without ruling out any options," Suzuki said.
Following his remarks, the Japanese yen jumped by 0.37% against the US dollar early on Friday. However, the yen's rally was rather short-lived.
Storm warning
USD bulls are still strong and will not go down without a fight. At this point, they have found support in several factors.
Many experts do not believe the Japanese government would actually decide to intervene, with 80% of economists polled by Bloomberg finding such a scenario unlikely.
A one-sided currency intervention would only have a short-term effect. It could prevent USD/JPY from hitting new highs, but it would not be enough to put an end to the yen downtrend.
Furthermore, the US dollar found additional support in strong US macroeconomic data. According to the latest data, which was released on Thursday, retail sales in the US unexpectedly increased by 0.3% in August. Retail sales remained unchanged in July.
In addition, the number of initial jobless claims fell by 5,000, a report by the US Labor Department said.
These data releases indicate that the US economy remains robust and could withstand several more interest rate hikes.
Expectations of hawkish Fed moves are likely to serve as the main driver for USD/JPY over the next couple of days.
The Federal Reserve is set to decide on interest rates at its policy meeting on September 20-21.
Around the same time, the Bank of Japan will conduct its own policy meeting, increasing the chances of a USD/JPY upward move. Many analysts see the BOJ continue its yield curve control policy.
The chances of a policy reversal by the BOJ to support the weak yen is extremely low. About 80% of experts polled by Bloomberg believe that the Japanese regulator will stick to its dovish policy at least until April, when BOJ governor Haruhiko Kuroda's tenure expires.
The BOJ's unwavering dovish stance amid aggressive Fed policy will increase the monetary policy gap between the United States and Japan even further, allowing USD/JPY to continue its massive rally.
However, it could likely happen in the longer term. USD/JPY could potentially experience even greater volatility in the run-up to the policy meetings of the Fed and the BOJ.
Until then, renewed speculation over a potential currency intervention in Japan by Japanese politicians is likely. Furthermore, there could be more statements about a possible 100 bps rate hike by the Federal Reserve.
