Japanese Yen trades with caution against US Dollar ahead of Fed’s monetary policy
- The Japanese Yen (JPY) edges down against the US Dollar while the Fed’s policy takes center stage.
- Investors expect the Fed to leave interest rates unchanged in the range of 3.50%-3.75%.
- The BoJ kept the door open for further interest rate hikes this year.
The Japanese Yen (JPY) trades cautiously against the US Dollar (USD) at around 159.65 during the European trading session on Wednesday. The USD/JPY pair is expected to remain on the sidelines, with investors awaiting the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
During the European trade, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally higher to near 98.70.
The CME FedWatch tool shows that the Fed will leave interest rates unchanged in the range of 3.50%-3.75%. This will be the third straight meeting when Fed officials will prefer maintaining the status quo.
Investors will pay close attention to comments from Fed Chairman Jerome Powell regarding the impact of the prolonged closure of the Strait of Hormuz on inflation, the economy, and the interest rate outlook. According to the CME FedWatch tool, the Fed will hold interest rates at their current levels during the year.
Meanwhile, the performance of the Japanese Yen against its other peers appears to be slightly positive. The Japanese currency trades higher after the Bank of Japan’s (BoJ) monetary policy announcement on Tuesday, in which it left interest rates unchanged at 0.75%, as expected. However, BoJ Governor Kazuo Ueda kept the door open for further monetary policy tightening.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
