USD/JPY Forecast: Yen Falls Sharply After Rate Hike Hopes Dim

• BoJ Deputy Governor Shinichi Uchida said the central bank should pause due to the recent volatility in global markets.

• The US dollar steadied as Fed rate cut expectations eased slightly.

• Investors are pricing a 70% chance of a Fed cut in September.

The USD/JPY forecast points North as the pair reverses its sharp decline. The yen plummeted after a Bank of Japan official dampened hopes for a near-term rate hike. Meanwhile, the dollar steadied as Fed rate cut expectations eased slightly.

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On Wednesday, BoJ Deputy Governor Shinichi Uchida said the central bank should pause due to the recent volatility in global markets. These remarks reduced the likelihood of a near-term rate hike in Japan. 

The Bank of Japan raised rates for the second time last week, boosting the yen and reducing the gap in interest rates between Japan and the US. As a result, investors gave up the carry trade that had thrived amid wide interest rate differentials.

Initially, investors had borrowed the yen at low rates to buy dollar assets for higher returns. However, the carry trade could lose popularity now that the BoJ is hiking and the Fed is about to cut rates. Consequently, the yen might recover beyond the recent 7-month peak. However, this depends on how fast the BoJ will tighten its monetary policy. A slow pace might keep pressure on Japan’s currency.

Meanwhile, the US dollar steadied as Fed rate cut expectations eased slightly. After last week’s jobs report, markets moved to price an 85% chance of a 50-bps rate cut in September. However, upbeat US service activity data eased recession fears and lowered the chances of this rate cut. Currently, there is a lower 70% chance of a rate cut in September. 

USD/JPY key events today

Investors might pause and reflect on the recent volatility as there are no high-impact releases from the US or Japan.

USD/JPY technical forecast: Bulls break above the 30-SMA

On the technical side, the USD/JPY price has broken above the 30-SMA with a solid bullish candle. At the same time, the RSI now trades above 50, in bullish territory. These changes indicate a shift in sentiment to bullish. The previous bearish trend paused near the 142.56 key level, where bulls resurfaced. 

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If the price sustains a move above the 30-SMA, it might retest the 150.03 resistance level. However, the price must start making higher highs and lows to confirm a new trend.

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