Yesterday, the USD/JPY pair fell by more than 100 pips without any signs of intervention. Its decline was associated with the weakening of the US dollar across the board. Analysts are sure that a downward movement of the US dollar will be short-lived.
JPY gains momentum
On Tuesday, the US currency sharply dropped by 0.9% and tested a 3-week low of 110.75 amid disappointing economic reports on the housing market and the Consumer Confidence Index.
New signs of economic slowdown in the US have fueled speculation about less aggressive rate hikes.
Some analysts expect the regulator to switch to smaller rate hikes at their next meetings to avoid further deterioration of the economy.
The 10-year US government bond yields decreased due to such expectations. Yesterday, the indicator drastically dropped by more than 14 basis points to 4.05%. Therefore, the USD/JPY pair also moved down.
The intraday low was located at the level of 147.50, down by 3% from the high reached in the previous week.
Last Friday, the dollar/yen pair climbed to a new 32-year high of 152, forcing the Japanese government to intervene.
Although Japan has not announced any interventions, many analysts are sure that this was the reason for a sudden decline in the greenback at the end of last week and at the start of the current week.
Yesterday's fall in the US dollar caused by fundamental factors gave some respite to the Japanese authorities. The pair has finally retreated from the psychologically important level of 150. It is trading well below it.
How long will it last? Many analysts are sure that the current weakness of the US dollar will be short-lived.
USD to rebound amid positive fundamental factors
Tomorrow, the US currency may resume an upward movement amid the publication of the US third-quarter GDP figures.
Analysts believe that the reading is likely to grow significantly on an annual basis. GDP is projected to climb to 2.4% following a 0.6% decline in the previous quarter.
If the report really turns out to be positive, it will renew expectations of further aggressive tightening by the Fed ahead of the November meeting.
The FOMC meeting will be held next week on November 2. Now, the chance of a 75 basis point rate hike totals more than 93%.
Some analysts reckon that the regulator may raise the interest rate by 100 basis points.
The main driver for a rally of the US dollar remains the Fed's hawkish stance. At the end of the week, the yen/dollar pair may jump because of the BoJ's dovish rhetoric.
The central bank will hold a monetary policy meeting on Thursday and Friday. It is widely expected to maintain its ultra-loose stance to boost the fragile Japanese economy with stimulus measures.
The probability that the BoJ will keep its monetary policy settings unchanged is high. The regulator would have hardly intervened if it planned to change a stance, Deutsche Bank currency strategist Alan Raskin said.
A strong commitment to a dovish stance could push the weak yen down as central banks worldwide stick to aggressive tightening.
Since the beginning of the year, the yen has sunk against the US currency by more than 22%. If there are new signs of the growing divergence between the US and Japan, the yen could fall even more.
The yen is highly likely to drop sharply again as it did last month if BoJ Governor Haruhiko Kuroda keeps monetary policy uncaged or at least does not change his rhetoric, analyst at Credit Suisse Hiromichi Shirakawa pointed out.
The USD/JPY pair could jump following Kuroda's speech. Traders should be ready for another intervention by the Japanese authorities and strong volatility.
Analysts at Wells Fargo stress that any intervention will have a short-lived effect. They predict further growth of the USD/JPY pair to 153 by the first quarter of 2023.
In Japan, economic growth is quite moderate and inflation is the lowest among major economies. It means that the BOJ will stick to its ultra-soft monetary policy for quite a long time, they emphasize.
