Japanese Yen Tumbles As Fed Signals Higher Rate Path

The Japanese Yen depreciated against the US Dollar on Wednesday after the US Federal Reserve delivered a hawkish hold, with most officials expecting one rate hike towards the end of the year, while the new Fed Chair, Warsh, reiterated the Fed’s commitment to achieving the 2% inflation goal. At the time of writing, the USD/JPY trades at 160.66 after bouncing off the daily low of 160.11.

Yen weakens as Fed dots revive US yield advantage

Fed Chair Kevin Warsh provided little insight into the future policy path during his press conference, noting that he had not submitted economic projections. Nonetheless, he stressed that inflation remains well above the Fed’s 2% target and said policymakers are unanimous in their commitment to restoring price stability.

About the policy statement, Warsh said it was designed to present the facts rather than signalling forward guidance. He also revealed plans to form task forces focused on communications, the balance sheet, data sources, productivity, employment, and inflation, among other areas, as part of a review of the Federal Reserve’s current framework.

On the US central bank dual mandate, Warsh said policymakers are not facing a “cruel choice” between achieving price stability and maximum employment. However, he acknowledged that the central bank still has more work to do to bring inflation back under control.

Fed’s monetary policy statement shortened

In its statement, the Fed eliminated forward guidance. The Fed recognized that the economy continues to grow strongly despite uncertainties surrounding the Middle East conflict and noted that the jobs market remains stable, with the unemployment rate remaining nearly unchanged.

Furthermore, “Inflation remains elevated relative to the Committee’s 2 per cent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”

The Fed’s Summary of Economic Projections (SEP) indicated that the median forecast is for the Fed Funds Rate to finish at 3.8%, up from 3.4% in March. US GDP is expected to expand by 2.2% by the end of 2026, while Core PCE, the Fed’s preferred inflation measure, is projected at 3.3%, which is 1.3% above the Fed’s 2% target.

USD/JPY Price Forecast: Technical outlook

The USD/JPY rallied by 0.14%, with the advance capped by investor fears of a possible Bank of Japan (BoJ) FX market intervention. The rise of US Treasury yields drove the pair higher, a headwind for the Yen, which is usually undermined by currencies with a wider interest rate differential, favouring the latter.

On the upside, the first resistance is 161.00. A breach of the latter will expose the 161.50, ahead of 162.00. On the downside, the first support would be the June 15 low of 159.73, ahead of the 50-day Simple Moving Average (SMA) at 159.04.

USD/JPY daily chart