Japanese Yen Drops as BOJ Keeps Policy Settings Unchanged: Where to for USD/JPY?

US Dollar, Japanese Yen and USD/JPY – Price Action:

• The Bank of Japan maintained its very loose policy, including the yield curve control policy.
• The Bank of Japan canceled its forward guidance on interest rates
• US dollar / Japanese yen It is trending toward the higher end of the recently created range.

The yen fell after the Bank of Japan (BOJ) left loose policy settings unchanged, particularly the closely watched Yield Curve Control (YCC) policy, but removed its forward guidance that pledged to keep interest rates at current or lower levels.

About an hour before the BoJ’s interest rate decision, USD/JPY was choppy after the Nikkei reported that the BoJ would drop the YCC review but was considering a change of expression in future guidance regarding the possibility of further policy easing.

USD/JPY 5-minute chart

Chart created using TradingView

Market expectations were muted going into the meeting after new BoJ Governor Kazuo Ueda confirmed, in his inaugural press conference earlier this month, that they are in no rush to change ultra-loose policy settings, including yield curve control (YCC). ). However, some were expecting adjustments in forward guidance as a way to prepare the markets for an eventual exit from the massive stimulus.

Given that the Bank of Japan is no stranger when it comes to presenting surprises, the USD/JPY risk reversal has shifted significantly in favor of the Japanese yen over the course of one week, suggesting that the options market was positioned for positive results. It surprised the central bank in December by raising the upper limit of its YCC range, and in January the bank stood alright when some expected the YCC range to be widened further.

USD/JPY: A one-week delta risk reversal over a 25-year period

data Source: Bloomberg; The chart was created in Excel

Inflation in Japan remains above the Bank of Japan’s 2% target – data released last week showed CPI slipping to 3.2% y/y in March from 3.3% in February. The new governor’s argument for maintaining the policy too easy is that recent inflationary pressures have been cost-driven and will prove fleeting.

Also, Ueda said earlier this month that major changes in YCC should be decided by looking at economic, price and financial trends. At the same time, he said the Bank of Japan should avoid delaying monetary policy normalization, while keeping the door open for policy adjustment at the June meeting. Focus now turns to US PCE data later today, the US Federal Open Market Committee meeting on May 3 and the European Central Bank meeting on May 4. Whether or not the USD/JPY jump is sustainable depends on the Fed’s tone at its meeting next week.

USD/JPY daily chart

Chart created using TradingView

On the technical charts, USD/JPY has been essentially directionless in recent weeks, although the broader picture remains bearish, as shown by recent updates. See “Time for the Yen to Rise? USD/JPY, EUR/JPY, AUD/JPY by the BoJ, published on April 21,” and “JPY Weekly Forecast: Ascending Triangle or Double Top in USD/JPY?” , published April 17.

Zooming in on smaller timeframes, USD/JPY appears to be driven by cross-currents – the pair has had a slight upward slope since the end of March, as evidenced by the upward sloping channel on the 240-minute chart. Recently, it has slid inside a downtrend channel since mid-April.

USD/JPY 240 minute chart

Chart created using TradingView

Unless the pair breaks above the horizontal trend line from March at around 135.00 on the upside, or the mid-April low at 132.00 on the downside, the path of least resistance could be sideways. A decisive break above 135.00 could open the way towards the March high at 138.00, while a break below 132.00 could present downside risks towards the January low at 127.20.

– Posted by Manish Grady, Strategist for DailyFX.com

Connect with Jaradi and follow her on Twitter: @JaradiManish