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.
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.’
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.
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.
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.
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