Home USD/JPY Forecast: Growing Yield Differential Between Dollar and Yen

USD/JPY Forecast: Growing Yield Differential Between Dollar and Yen

  • Investors expect the Fed to raise interest rates by as much as 100bps.
  • Markets expect the BoJ to hold its negative rates.
  • The yield differential between the dollar and the yen might hit 300bps.

Today’s USD/JPY forecast is bullish as the Federal Reserve will increase interest rates later today by as much as a full percentage point. The Bank of Japan will undoubtedly solidify its position as the only global dove in developed markets by maintaining its negative rates tomorrow.

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The yield differential between the two markets will reach 300 basis points (bps), and analysts predict Mrs. Watanabe—the renowned Japanese retail trader—will abandon the yen and send money abroad.

“In terms of pure FX carry, the dollar will soon provide 3%, the yen is still 0%, so that’s a big difference,” says Shusuke Yamada, chief forex and rates strategist at Bank of America in Tokyo. The Bank of Japan should be concerned about the blow to the already battered yen, down 20% against the dollar this year.

Yield-seeking Japanese consumers were absent from the world’s currency markets during the pandemic years as central banks pushed interest rates toward zero, squeezing out currency spreads and putting an end to the prevalent “carry” trade backed by the yen. That has now changed.

USD/JPY key events today

The Federal Reserve will have its rate decision meeting later today, where it is expected to raise rates by 75bps.

The BoJ is expected to hold its rates at -0.10% later today. There will also be the Bank of Japan’s Monetary Policy Statement which includes a discussion of the economic factors that the BoJ considered when making its decision to purchase assets, as well as the results of that decision.

USD/JPY technical forecast: Tight consolidation along the 30-SMA

USD/JPY forecast

The 4-hour chart shows the price trading in a sideways move. The price is trading slightly above the 30-SMA and the RSI slightly above 50. Even though bulls are currently marginally stronger, the price is trading in a very tight band, and bears might take over soon.

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The price also trades within a bigger range, with resistance at 144.954 and support at 142.015. The previous trend was bullish, which gives bulls a higher chance of retesting resistance at 144.954 and possibly breaking above. However, if bears win, the price will be retesting at 142.015.

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Saqib Iqbal

Saqib Iqbal

Saqib Iqbal is a market analyst, prop fund trader and mentor, serving the industry with his analysis and educational content since 2011. The author has great exposure to different financial markets and institutions. He's well-known for his day trading reviews and multiple timeframe analysis.