The greenback has erased nearly all of this week’s losses as today’s Bank of Japan decision undermined the Japanese currency, sending the USD/JPY pair sharply higher.
BoJ crashes the JPY
After the Bank of Japan (BoJ) opted to maintain its ultra-lose policy settings and reaffirmed its stance to preserve borrowing prices at “current or lower” levels, the Japanese yen declined broadly. Additionally, the Japanese central bank promised to aim for a 10-year government bond rate of around 0%.
Additionally, Haruhiko Kuroda, the head of the Bank of Japan, reaffirmed that if necessary, they will not hesitate to loosen monetary policy further. He added that the central bank does not aim at a specific currency level.
“Not thinking of raising the cap on BOJ’s long-term yield target above current 0.25% as it may result in higher yields, weaken the effect of monetary easing,” he added.
According to the BoJ, the yield curve control can be maintained even with rising overseas yields by ramping up bond-buying and carrying out fixed-rate operations.
Since the Bank of Japan has remained as dovish as possible, the Japanese Yen plunged sharply, losing nearly 2% against the USD during the US session and trading near the 135 threshold for the USD/JPY pair.
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Fed raises rates
On the other hand, it is essential to remember that the Federal Reserve increased interest rates by 75 basis points on Wednesday, the most significant increase since 1994, and signaled a quicker path toward tighter policy in order to contain price pressures. As a result, the median year-end prediction for the federal funds rate increased from 1.9 percent in the March estimate to 3.4 percent and from 3.8 percent in 2023, according to the so-called dot plot.
The massive divergence between the Fed and the BoJ should keep the long-term uptrend in USD/JPY intact.
In other news, analysts had predicted that US industrial production would rise in May for the fifth consecutive month, but at a much slower rate of just +0.4% monthly. It indeed rose on a monthly basis, although only 0.2%, below the consensus value.
Even more noteworthy, though, was the fact that US manufacturing production decreased in May (-0.1% MoM against +0.3% MoM exp and +0.8% in April).
If we see another uptick in US yields, the USD/JPY pair could advance to new cycle highs, targeting the 140 threshold.
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