The Federal Reserve did not let the dollar down. The FOMC minutes published yesterday showed that the central bank is still holding inflation at gunpoint and intends to keep raising rates. This gave a strong boost to the USD/JPY, which has looked like a dying swan lately
Yesterday's release of the minutes of the December FOMC monetary policy meeting shook the markets, which had already started to write off the USD/JPY pair.
The report showed that most US officials are in favor of slowing the pace of interest rate hikes. But no one is going to relax: inflation in the US is still at high levels, far from the target, which implies a further aggressive policy.
On the same day, Minneapolis Fed President Neel Kashkari further reinforced the hawkish expectations of traders. He said that the US target interest rate could peak at 5.4% this year, above the market forecast of 4.98%.
Against this backdrop, U.S. 10-year bond yields surged from a 6-day low of 3.67% to 3.71%. In response to this jump, the Japanese yen, which is extremely sensitive to changes in U.S. bond yields, went into a precipitous decline.
The JPY depreciated 1.2% against its U.S. counterpart on Wednesday, falling to a near-weekly low of 132.70.
Yesterday's dovish statement from the Bank of Japan chair also provided strong support to the dollar-yen pair. BOJ Governor Haruhiko Kuroda reiterated that the central bank intends to continue its ultra-loose policy in order to stimulate wage growth in the country.
The next key trigger for the USD/JPY pair should be the US labor market data. The first batch of important data will be released today - the ADP NonFarm Payrolls report.
Now economists are expecting the figure to increase by 150,000 against the previous value of 127,000. An optimistic picture of the US labor market might be an excellent fuel for the USD but most likely its triumph will be short-lived.
The dynamics of the greenback in the longer term will be determined by tomorrow's December NonFarm Payrolls report from the US Bureau of Labor Statistics.
According to preliminary estimates, the number of non-farm payrolls last month will rise by only 200,000 against the previous month's figure of 263,000.
Disappointing data may significantly weaken the market's hawkish expectations regarding the Fed's future policy, which will have a negative impact on the dollar.
Many analysts are predicting that after the release of NFP, the pair will go into a deep spiral and erase all its recent gains.
The major's position is also exacerbated by growing fears among traders about slowing inflation in the U.S. Yesterday, the market got another proof that inflationary pressure in the country is decreasing, as the ISM survey's measure of prices paid by manufacturers dropped from 43 to 39.4.
Considering all the existing risks, experts believe that only a miracle in the form of strong consumer price growth data will help the dollar now.
The inflation report for December will be published next week. If traders and investors do not see any signs of price growth slowing down, it will mean that the Fed has a lot of work to do to tighten its rate. That is a positive scenario for the greenback and the USD/JPY pair.
As for the negative triggers, the biggest danger for the USD/JPY asset right now is an increase in speculation about a possible BOJ dovish policy rollback.
Reuters reported Thursday morning, citing 3 sources close to the BOJ, that the central bank intends to raise its forecasts for the core consumer price index for 2022 and 2023.
If the BOJ does decide to take such a step, it would further reinforce the market's view of its potential pivot, which could trigger another yen rally.
As you can see, at this stage there are too many questions for USD/JPY traders, which have not yet been answered. The uncertainty in the market is going too high that affects the trend of the major, and the pair has also been swinging back and forth lately.
Experts think we will see higher volatility in the asset until investors figure out what to expect from the Fed and the BOJ this year.
