Analysts are predicting strong volatility for the USD/JPY pair in the next couple of days. There is a high chance that by the end of the week, the greenback will not only recover its recent losses against the Japanese yen, but also jump significantly.
What can resume USD rally?
Last Friday, the American currency reversed course after a significant decline the day before. However, the dollar still ended the week in negative territory, falling 0.5% against a basket of major currencies and showing the worst performance against the yen.
Last week, the pressure on the greenback was fueled by investors' heightened concerns about an impending rate hike pause at the June FOMC meeting and the further monetary tightening by the Federal Reserve.
Currently, most market participants are confident that the central bank will not raise interest rates this month, marking the first pause since March of last year when the current tightening cycle began.
At this stage, it is popularly believed that the June pause could be the beginning of the end. Many traders expect the Federal Reserve to adopt a softer stance and start cutting rates at its upcoming meetings.
However, analysts believe that the market may be deeply mistaken about these dovish prospects. The actual situation will become clear in the coming days.
On Tuesday, June 13, the US will release the Consumer Price Index (CPI) data for May. Economists currently forecast that overall inflation decreased to 4.2% YoY from 4.9% last month, while core inflation declined to 5.3% from 5.5%.
As before, the key focus for the market will be the core inflation. If this data turns out to be hotter than expected, it will likely prompt investors to adjust their assessments of the future Fed monetary policy course.
Analysts from ANZ noted that strong core CPI could influence the FOMC policy decision in June, as well as the regulator's subsequent steps.
Experts still believe that a 25-basis-points rate hike this month is possible. If their forecast proves true on Wednesday and the Federal Reserve shocks the markets with another rate increase, as its Australian counterpart did last week, it will allow the US dollar to rise across the board, especially against the yen, which is under the dovish pressure of the Bank of Japan.
Analysts also warn that the US dollar may receive an even greater boost midweek after the publication of updated dot plots.
UBS currency strategists have noted that more sustained inflation is likely to force the Federal Reserve to revise its dot plot upwards. According to their outlook, the Federal Reserve would maintain its hawkish stance until the end of 2023.
This viewpoint is shared by economists at the National Bank of Fujairah. They believe that the US central bank will keep rates high until the first quarter of 2024, which will provide excellent support for the USD. According to NBF's forecast, the dollar will continue to strengthen in the coming months.
Another driving force for USD/JPY
Most analysts forecast that at the end of the trading week, USD/JPY could significantly accelerate its upside movement following the Bank of Japan's monetary policy meeting.
Reuters reported, citing sources close to the BOJ leadership, that the central bank is likely to maintain its key monetary policy parameters unchanged this week.
Interest rates will remain at -0.1%, and the yield on 10-year bonds will continue to be held at 0% as part of the yield curve control (YCC) policy.
"The BOJ must support the economy to ensure recent positive signs are sustained, and help Japan sustainably achieve 2% inflation," an insider cited by Reuters said.
The GDP data released last Friday showed that Japan's economy grew stronger than expected in the first quarter of 2023 and advanced by 2.7%. However, many experts believe that the central bank will maintain its forecast of moderate economic recovery this week, indicating it would maintain its ultra-loose monetary policy.
BOJ's inflation forecasts will not be released at the June meeting. The central bank will present its updated consensus estimates during the next quarterly review in July.
Some market participants believe that the Bank of Japan may revise its inflation forecasts upward in the future, considering the fact that many companies continue to raise the prices of goods. Furthermore, current inflation noticeably exceeds BOJ's earlier estimates.
Last week, BOJ Governor Kadsuo Ueda warned market participants that inflation in the country could strengthen in the near future but also made it clear that it will take considerable time to achieve the main goal of sustainable 2% price growth.
"IIt's still too early to call that this inflation has been sustainable and stable. My guess is that at the June meeting, there will be nothing," said Masadzumi Wakatabe, former deputy head of the Bank of Japan, in an interview with Bloomberg TV on Monday.
The official is confident that the Bank of Japan will keep interest rates at a minimum not only this week but also at its upcoming meetings since the current fundamental picture remains highly uncertain.
The risk of a global recession, which is increasing amid continued tightening by major central banks, casts doubt on the further confident recovery of the Japanese economy.
Another likely scenario is that inflation in the country may not meet market expectations and might even decline in the foreseeable future. This was indicated by the Japan Producer Price Index data, which was published this morning.
In May, the PPI sharply declined to 5.1% YoY from 5.8%. Producer price inflation has posted a fifth consecutive decline, which may indicate weakening inflationary pressure in the country.
This could mean the Bank of Japan has no substantial arguments in favor of normalizing its monetary policy at the June 15-16 meeting, especially given the fact that governor Kazuo Ueda has repeatedly stated his intention to wait before making any significant changes to the central bank's stimulus measures.
"The central bank probably wants to delay any policy change to later this year or even longer, given that there's no urgency at all in the market, unlike a while ago," Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo said.
If the Bank of Japan truly presents no surprises this week and maintains the status quo, it will trigger a strong USD/JPY rally. According to forecasts, by the end of the week, the dollar-yen pair may return to its recent highs above the level of 140.
