USD/JPY traders will not be bored this week. US inflation data will be released on Tuesday and the Federal Reserve's interest rate decision will be announced on Wednesday. Both events may cause a strong surge in volatility.
Last week, the Dollar-Yen was the biggest gainer in 7 weeks. It rose 1.7%.
However, I wouldn't say that the journey was smooth. In the past few days, USD/JPY has been going through a rough ride as the market was trying to find out the trajectory of the Fed's future course.
This week, analysts expect even steeper dynamics on the pair's chart, as the macroeconomic intrigue should finally be resolved.
As early as tomorrow, the US consumer price index for November will be published. The Fed's tone at the upcoming FOMC meeting on Wednesday will largely depend on this data.
With U.S. inflation slowing significantly in October, most market participants now expect the Fed to slow down the pace of rate hikes and raise the index by just 50 bps.
At the same time, dollar traders have not given up hope to hear a hint of a higher level of final rates from the central bank. If we see minimal progress on inflation at the end of last month's results, that is likely to be the case.
Economists estimate that the overall U.S. consumer price index will remain unchanged at 7.7%, and the base indicator will rise to 6.4% year-on-year.
If the forecast comes true, it will mean that the Fed has a lot of work to do to get inflation back to its 2% target. So rates could indeed rise above 5%, as the market expects.
If the Fed lives up to traders' expectations of a higher interest rate peak at Wednesday's meeting, then the U.S. currency could get a strong boost, especially against the yen.
Some experts predict that in the coming days, the pair might soar to 140, whereas now it is trading slightly above 137.
Recall that in November, the Japanese currency managed to strengthen against the greenback by more than 7% due to rising expectations of a slowdown in US tightening.
However, this topic has now completely exhausted itself, because the market does not even doubt that the Fed won't be as aggressive as before.
Traders have already taken that risk into account and the yen is out of trumps. The only thing that can help it at this stage is unexpectedly weak US inflation data.
If we get another shocking report tomorrow like we got in October, it will trigger another wave of speculation about a possible end of the Fed's hawkish policy. Such a development would really knock down the USD/JPY bulls and push the pair down towards the recent low of 133.
At the moment, however, most analysts are betting the opposite, given the strong current pressure on the yen among other things.
Over the weekend, Bank of Japan board member Hajime Takata said in an interview with Nikkei newspaper that Japan's economy has not yet entered a phase where the central bank can stop controlling the yield curve.
This comment cast doubt on the recently popular version about a possible tightening of the monetary policy of the BOJ.
Currently, most traders are inclined to believe that both the Fed and BOJ will not retreat from their monetary policies next year (at least in the first half of the year).
This means that the U.S. and Japanese interest rate differentials will continue to widen. In such a scenario, the dollar would strengthen and the yen would fall.
