The USD/JPY exchange rate is consolidating after recent declines, with markets anticipating a 25 basis point hike by the Bank of Japan (BoJ). While analysts remain optimistic about BoJ policy normalization, concerns exist about a potential dovish hike and the risk of excessive JPY strength.
The USD/JPY exchange rate has been consolidating following a recent decline. Market sentiment suggests a 92% probability of a 25 basis point interest rate hike by the Bank of Japan (BoJ) at its upcoming Monetary Policy Committee (MPC) meeting on Friday. Currently, USD/JPY is trading around 155.70, according to OCBC's FX analysts Frances Cheung and Christopher Wong. Analysts express concern about a potential dovish hike from the BoJ, which could limit the downward movement of USD/JPY .
They maintain their view that the BoJ has room to normalize its monetary policy, citing ongoing economic data trends such as inflation and wage growth.Recent corporate announcements, including Fast Retailing (Uniqlo)'s decision to raise starting pay for new employees by 10% and existing employees by 5%, along with Meiji Yasuda's plan to increase wages by an average of 5% for all 47,000 staff starting in April, reinforce the narrative of a strengthening Japanese economy. Furthermore, rising JP CPI and PPI figures point towards a path for BoJ policy normalization.However, there is a risk that the BoJ might refrain from providing explicit guidance on future policy actions to avoid excessive JPY strength that could hinder economic progress. Analysts anticipate that divergence in Federal Reserve (Fed) and BoJ policies will likely lead to a further narrowing of UST-JGB yield differentials, contributing to the overall downward trajectory of USD/JPY. The potential risk to this view arises from a slowdown in the pace of policy normalization by either the Fed or the BoJ. Technically, daily momentum suggests a bearish outlook, while the RSI indicates a potential for upward movement. Consolidation is expected with resistance levels at 157.10 (21 DMA), 158.80 (recent high) and support levels at 154.90 (50 DMA), 154.30 (23.6% Fibonacci retracement of September low to January high) and 152.80 (200 DMA).
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