The Japanese yen continued its strong downward trend, reaching its lowest level since September 3 as traders reflected on the latest Federal Reserve and Bank of Japan (BoJ) interest rate decisions. The USD/JPY pair rose to 157.03, up sharply from this month’s low of 152.90.
Bank of Japan hikes interest rates
The USD/JPY pair continued rising after the BoJ delivered its highly anticipated interest rate decision. As was the case with widely expected, the bank decided to hike rates by 0.25% to 1.25%. It pushed rates to the highest level in more than two decades.
The bank hiked interest rates to boost the Japanese yen and to curtail the elevated consumer inflation. Data released earlier today showed that the headline consumer price index (CPI) remained at 1.9%, while the core CPI eased a bit from 1.8% to 1.7%.
Japan’s inflation will likely remain at an elevated level in the coming months now that energy prices are soaring. Crude oil priceshave risen, with Brent and the West Texas Intermediate (WTI) trading above $100 as the US-Iran war continues. Officials hinted that they will hike interest rates this year if inflation continues rising.
Federal Reserve interest rate hike
The USD/JPY pair continued rising as investors reacted to the latest Federal Reserve interest rate decision. As was widely expected, the Fed decided to hike interest rates by 0.25% in a unanimous vote.
The Fed brought rates to between 3.75% and 4%, with Kevin Warsh hinting that the bank will deliver another increase. A Polymarket market has a 51% probability that the bank will hike interest rates by another 25 bps in October. Another one has a 66% chance that the bank will hike in December.
The Fed is hiking rates at a time when inflation has remained sticky. A recent report showed that the headline Consumer Price Index (CPI) rose 3.4% in August, higher than the 2% target.
The USD/JPY pair is rising for two main reasons. First, the BoJ’s rate hike matched market expectations, while the Fed’s hawkish stance did not. That surprise hawkishness is why the US dollar has kept rising. Second, with Japanese rates still low relative to the US, the yen remains attractive as a funding currency for carry trades, adding further upward pressure on the pair.
USD/JPY technical analysis
USDJPY chart | Source: TradingView
The 2-hour chart shows that the USD/JPY pair has been in a strong upward trend in the past few days. It moved from a low of 152.90 earlier this month to the current 157.
The pair has moved above the important resistance level of 156.75, its highest level on September 4 and the 50% Fibonacci Retracement. It has remained above the 50-period Exponential Moving Average (EMA).
The pair has also formed an ascending channel. Also, the Relative Strength Index (RSI) has moved to the overbought level of 75.50. Therefore, the pair may retreat to the lower side of the channel in the coming days. If this happens, it will retreat to the lower side of the channel.
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