USD/JPY Forecast: BoJ Stays Dovish Outlier, Fed to Hike in May

• Japan will continue to be a dovish outlier by maintaining ultra-low interest rates.

• Japan’s inflation will likely fall below the BOJ’s 2% target later this year.

• The market expects another interest rate increase by the US Federal Reserve in May.

Today’s USD/JPY forecast is bullish. The new central bank of Japan Governor, Kazuo Ueda, sent a strong message to policymakers assembled for meetings on global finance over the past week. At least for now, Japan will continue to be a dovish outlier by maintaining ultra-low interest rates.

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Since taking over a week ago, Ueda has suggested that the expansive stimulus put in place by his dovish predecessor Haruhiko Kuroda may eventually be reduced.

Ueda explained his decision to maintain an ultra-loose monetary policy to the larger gathering of ministers from the Group of 20 on Thursday. He stated that Japan’s inflation, currently around 3%, will fall below the BOJ’s 2% target later this year due to declining import costs.

The BOJ’s dovish comments are likely an attempt to prevent a repeat of January. Long-term interest rates rose then due to market expectations of a quicker change in the BOJ’s yield curve control (YCC) policy.

Under YCC, the BOJ sets short-term rates at -0.1% and the yield on 10-year Japan government bonds at zero with an implicit ceiling of 0.5%. 

The 10-year yield is currently slightly below the cap at 0.47%, although speculators repeatedly drove it above 0.5% earlier this year, forcing the BOJ to defend the barrier.

The dollar rose against the yen on Monday due to the BOJ’s dovish remarks and increased market expectations of another Fed hike in May.

USD/JPY key events today

Investors are not expecting any key releases from Japan or the US, so we might have a relatively quiet trading session.

USD/JPY technical forecast: Bulls to pounce 134.00

In the 4-hour chart, USD/JPY is at the 134.01 resistance level. The bias here is bullish as the price trades above the 30-SMA with the RSI above 50. The bullish bias can also be seen in the series of higher highs and lows. 

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The price made a higher low at the 132.00 key level. Bulls then returned to push above the 30-SMA and the 133.50 resistance. They will now be looking to make a higher high above 134.01.

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