Bank of Japan’s Crucial Policy Decision and Inflation Sparks Interest

Monday Overview of USD/JPY Movements

The USD/JPY fell by 0.36% on Monday. Following a 0.51% loss on Friday, the USD/JPY ended the session at 149.055. The USD/JPY rose to a high of 149.855 before falling to a low of 148.802.

The Bank of Japan Is in the Spotlight

On Tuesday, the Bank of Japan (BoJ) will take center stage with its penultimate monetary policy decision in 2023. Hotter-than-expected inflation numbers and expectations of an upward revision to BoJ inflation forecasts have fueled bets on a BoJ tweak to monetary policy.

Sources close to the matter, according to Nikkei Asia, said the BoJ may allow JGB yields to climb above 1%. A tweak to the YCC policy and discussions about exiting negative interest rates would fuel the appetite for the Japanese Yen.

BoJ inflation forecasts could prove pivotal to the outlook for interest rates. Wage growth and demand-driven inflation have failed to materialize. An elevated inflation environment could force the BoJ to consider a pivot from negative interest rates.

Before the monetary policy decision, unemployment, retail sales, and industrial production figures from Japan will be in focus. Tighter labor market conditions and an unexpected jump in retail sales could be early signs of demand-driven inflation.

US Employment Costs and Consumer Confidence in Focus

Wage growth and consumption remain considerations for the Fed.

On Tuesday, US employment costs and consumer confidence will garner investor interest. Softer-than-expected employment costs and consumer confidence would signal a negative consumption outlook. A downward trend in consumption would ease demand-driven inflation, reducing the chances of a Fed rate hike.

Economists forecast employment costs to increase by 0.8% in Q3 (Q2: 1.0%). Notably, economists expect the CB Consumer Confidence Index to fall from 103 to 100 in October.

Short-term Forecast

The Bank of Japan and the Fed will dictate the near-term trends for the USD/JPY. A BoJ tweak to its ultra-loose monetary policy stance and a cautious Fed would weigh heavily on the USD/JPY.

USD/JPY Price Action

Daily Chart

The USD/JPY held above the 50-day and 200-day EMAs, sending bullish price signals. A USD/JPY fall through the 148.405 support level would give the bears a run at the 50-day EMA.

The Bank of Japan monetary policy decision, inflation forecasts, and forward guidance will be early focal points.

However, a return to 150 would give the support a move to the 150.201 resistance level. If the Bank of Japan leaves the YCC policy unchanged, the USD/JPY could retarget the 151 handle.

The 14-day RSI at 49.36 suggests a USD/JPY fall through the 148.405 support level and 50-day EMA before entering oversold territory.

4-Hourly Chart

The USD/JPY sits below the 50-day EMA while hovering above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

A USD/JPY fall through the 200-day EMA would bring the 148.405 support level into play.

However, a move through the 50-day EMA would support a break above the 150.201 resistance level to bring 151 into view.

The 14-period 4-hourly RSI at 33.85 suggests a USD/JPY fall through the 200-day EMA before entering oversold territory.