Yesterday, Federal Reserve Chairman Jerome Powell threw coal on the waning flames of the dollar. Although his hawkish stance did not help the USD much initially, many analysts are confident that further rate hikes in the US will support the greenback.
Wednesday's main event in the currency market was the Fed's monetary policy meeting. As expected, the central bank raised the interest rate not by 75 bps, but only by 50 bps, bringing it to the range of 4.25%-4.50%.
However, there were some surprises. Given the latest U.S. inflation data, which turned out to be tepid, the market did not count on the Fed chairman's overly aggressive tone.
Nevertheless, Powell said Wednesday that the Fed will continue to raise interest rates next year, despite a possible recession in America. At the same time, he stressed that the rate could peak above 5%.
"By raising terminal rate projections to 5.1% and avoiding a sharp drop in longer-term rate expectations, officials refused to back down from the 'higher-for-longer' message that has been articulated for months," said Karl Schamotta, chief market strategist at Corpay. "On balance, this suggests we will need to see more conclusive evidence of an easing in inflation pressures before the Fed 'pivots' in any meaningful way."
The hawkish ambitions of the US central bank initially supported the dollar, which seemed to have already lost any hope for further growth. In this backdrop, the USD/JPY demonstrated a sharp jump, rising from 134.50 to 136.00.
A little later, the yen managed to recover some of its losses amid the general weakness of the dollar. When the initial emotions cooled down, the market tried to assess the real prospects for a rate hike amid a looming recession.
Investors are now increasingly doubtful that the central bank can continue to ignore the risk of a slowing economy. There are fears that this threat will hinder the Fed's plans for further tightening.
Despite growing skepticism, the fact remains that the Fed does not intend to put the brakes on in the near future, and this should support the U.S. currency on many fronts, also against the yen.
Rabobank analysts expect the USD/JPY pair to strengthen in the next few months. They estimate that the pair will trade in the 136-138 range in the first quarter of 2023.
As for the pair's dynamics in the near future, the dollar may get an additional growth impulse as early as next week. The greenback should be supported by the dovish rhetoric of the Bank of Japan.
The BOJ will hold its last monetary policy meeting of the year on December 19-20. Economists predict that the central bank will maintain its ultra-soft monetary policy, which implies ultra-low interest rates.
With the Fed targeting further tightening, it is likely that monetary divergence between the US and Japan will continue to grow next year (at least in the first half of it). This will put a lot of pressure on the yen.
Of course, the possibility of an unexpected BOJ capitulation cannot be discounted. Traders are now increasingly focused on what will happen after current central bank governor Haruhiko Kuroda leaves office in April. There is an opinion that his departure will become a starting point for normalization of the BOJ's monetary policy.
However, it is still a dubious bargaining chip in the hands of the yen and is unlikely to help the JPY for the foreseeable future.
The dollar now has stronger fundamental support, which could change the technical picture in its favor.
On Thursday morning, the retreating bearish slope of the MACD signals a further recovery of the USD/JPY pair. Also, a bounce of the quote from the short-term key support line indicates a potential rebound.
In order for the bulls to take the final advantage, they need a clear breakthrough in the area of 135.80-136.00. In case the bulls manage to lift the quote above 137.15, it is impossible to exclude growth to the maximum fluctuation of the end of November about 139.90, and then to a round figure of 140.00.