USD/JPY bumps up against key resistance ahead of major central bank decisions

The Bank of England and Swiss National Bank issued monetary policy decisions on Thursday, and both central banks left their respective interest rates unchanged. However, their policy stances diverged sharply, as was expected. The Bank of England issued a hawkish statement that stressed the probability of stimulus reduction and further opened the path to higher interest rates in reaction to rising inflation and declining unemployment. For its part, the Swiss National Bank mostly remained as dovish as it has been for a long time. One slight glimmer of hawkishness was seen when the SNB changed its usual labeling of its currency from “significantly overvalued” to only “highly valued,” due to the Swiss franc’s weakness against the euro. But the central bank went on to state that "the situation on the foreign exchange market is still fragile." The divergent contrast between the hawkish tone of the BoE and continued relative dovishness of the SNB prompted a strong and rapid surge for GBP/CHF.

The current parade of central banks is not yet over. Next week features key decisions from both the US Federal Reserve (on Wednesday) and Bank of Japan (on Thursday). Again, both central banks are expected to keep monetary policy essentially unchanged. But again, their tones and stances have the high likelihood of moving their respective currencies. The Fed’s statement and press conference on Wednesday are eagerly anticipated, especially given the US consumer inflation data that was released on Thursday, showing a higher-than-expected rise in consumer prices of +0.4% in August against a prior forecast of +0.3%. The US dollar had been on a strong rebound from long-term lows this week before the inflation data was released. While the inflation reading gave an initial boost to the dollar on Thursday, the surge was short-lived, as the dollar soon retraced and reversed its gains. This reversal could be partly due to the realization that the consumer price data might not be enough to prompt a hawkish turn for the Fed. Meanwhile, the Japanese yen has shown recent weakness against other currencies that has been driven in part by declining safe-haven demand as market risk aversion has diminished substantially.

In the run-up to next week’s central bank decisions, USD/JPY has been rising on a rebounding dollar and falling yen for most of this week. This rise has brought the currency pair up from last week’s spike below the key 108.00 support level up to its current position above the 110.00 level. In the process, USD/JPY has also bumped up against the underside of a major trading range consolidation pattern that was broken down in early August. The key question now is whether the dollar can continue to rebound considering that the Fed that may still be unlikely to make a major hawkish shift, even in the face of higher consumer inflation. Additionally, while market and geopolitical risks have been subdued for the time being, any reemergence of risk aversion is likely to give a quick boost to the yen. Amid these considerations, USD/JPY could have some difficulty rising much further. If the currency pair turns back down from resistance and drops below the 110.00 level, the likelihood of a downtrend resumption increases. In that event, the near-term downside target remains at the key 108.00 level.