JAPANESE YEN OUTLOOK:

• Bank of Japan and Federal Reserve monetary policy meetings to take center stage in the week ahead
• Volatility could pick up for the U.S. dollar and Japanese yen, with several risk events on the calendar
• This article looks at the key technical levels for USD/JPY worth watching in the near term

The Bank of Japan and the Federal Reserve will hold their penultimate meeting of 2023 next week. These high-profile events could trigger elevated FX market volatility, which could mean sharp moves for the USD/JPY exchange rate in the coming days. To avoid getting caught on the wrong side of the trade, the retail crowd should follow both proceedings closely, paying special attention to forward guidance from both institutions.

BANK OF JAPAN DECISION

The Bank of Japan is broadly expected to keep interest rates unchanged at -0.10%, continuing its policy of negative borrowing costs. In terms of the inflation outlook, the institution led by Kazuo Ueda is seen revising its 2024 forecast for the consumer price index to 2.2% from 1.9% previously, marking the third consecutive year in which headline CPI will exceed the official target of 2.0%.

To offset a higher CPI projection and safeguard credibility, it is possible that the BoJ could adjust its yield curve control program, allowing long-term government bond rates to moderately drift above the current cap of 1.0%. Such a YCC tweak is likely to have a positive effect on the yen, even if policymakers refrain from framing it as a step toward ‘policy normalization.’

FEDERAL RESERVE DECISION

On Wednesday, it will be the Federal Reserve's turn to announce its decision. Markets largely expect the FOMC to stand pat on monetary policy, keeping its benchmark rate in a range between 5.25% and 5.50%. This means that the focus will be on forward guidance, especially on Chairman Powell's comments during his press conference.

In September, the central bank left the door open to further policy firming in 2023, but conviction around another hike has been waning in recent weeks, with several policymakers indicating that the bond market is doing the work for them by tightening financial conditions via higher yields. Traders should pay attention to what Powell has to say about this.

If Powell leans towards delivering another quarter-point hike this year, the U.S. dollar could rally sharply against the Japanese currency as traders reprice higher the Fed’s terminal rate. With the economy still firing on all cylinders and inflation showing high degree of stickiness, this scenario should not be ruled out entirely just yet.

On the other hand, if the central bank chief embraces a more cautious posture and signals that the aggressive tightening cycle that began in 2022 is over, we could see USD/JPY retrace some of its recent gains, but any pullback will likely be limited given the divergence in monetary policy between the Fed and the Bank of Japan.

USD/JPY TECHNICAL ANALYSIS

On a long-term horizon, USD/JPY remains entrenched in a solid uptrend. On a shorter timeframe, however, the pair has been coiling inside a rising wedge, a bearish pattern composed of two converging upward sloping lines that connect a series of higher highs and higher lows.

Confirmation of the rising wedge occurs when prices successfully breach its lower trendline, which is considered a dynamic technical support. In the case at hand, the area to watch is at 149.50. A break below this floor could see a pullback towards the 148.00 handle. On further softness, the focus shifts to 146.00.

In the event of renewed strength, resistance for USD/JPY first appears around 150.75, the 2023 high. Upside clearance of this key ceiling could reinforce upward momentum, setting the stage for a rally towards last year’s peak at 151.95. Beyond that level, attention turns to channel resistance near 152.70.

USD/JPY TECHNICAL CHART

USD/JPY Chart Created Using TradingView

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