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The USD/JPY exchange rate drifted downwards after the strong US GDP data and the Federal Reserve decision. The pair retreated to a low of 138.85 even as the US dollar index (DXY) jumped by almost a percentage point.

Bank of Japan decision

The USD/JPY price came under pressure after the Federal Reserve delivered its interest rate decision on Wednesday. In it, the bank decided to hike interest rates by 0.25%, pushing them to 5.50%, the highest level in over 20 years.

Analysts have mixed feelings about the next actions of the Federal Reserve. Some believe that the rate hike was the final one since inflation is gradually falling. On the other hand, some analysts expect the Fed to deliver at least one more hike this year.

The latter analysts believe that the American economy is still strong as evidenced by the economic data published on Thursday. The numbers revealed that the economy expanded by 2.4% in Q2 after growing by 2.0% in Q1.

This growth was mostly because of increased government spending and fixed asset investments, which offset a slowdown in consumer spending. The USD/JPY will react to the latest personal consumption index (PCE) data scheduled for Friday. Analysts expect that the PCE index rose by 3.1% in June from the previous 3.8%.

The other important JPY news will be the interest rate decision by the Bank of Japan (BoJ). Economists expect that the BoJ will continue leaving interest rates unchanged at minus 0.1% in its July meeting. Rates have remained at this level for years.

Analysts expect that the bank will tweak its yield curve control as a first step to exit the ultra-low monetary policy. It will likely decide to allow bond yields to move above 0.5%. Besides, the economy is doing well and inflation has remained above 2% for months. The BoJ decision will come four hours after Japan publishes its inflation data.

USD/JPY forecast

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There are two scenarios ahead. First, if the bank decides to stick with the current yield curve control, then it means that the pair will shoot up since most analysts expect the USD/JPY pair to rally and potentially hit 145. In a note, analysts at ING said:

“If the BoJ decides to leave the current policy settings unchanged, then USD/JPY looks as though it can push back to the recent high at 145 – coincidentally the first level at which Japanese authorities sold FX during their US$70bn FX intervention campaign.”

On the other hand, if the bank tweaks the yield curve control, the pair will dip as sellers target the key support at 137.50.

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