Will the Fed and BoJ move in opposite directions?

In the coming week, the Fed and the Bank of Japan (BoJ) will convene for their policy meetings, and according to Thu Lan Nguyen, analyst at Commerzbank, these will essentially determine further developments in USD and JPY exchange rates.

Key Quotes

“The US dollar has seen large gains in the last few days, with tailwinds coming from rising rate hike expectations in particular. The market-implied probability of a rate hike by the Fed by the end of this year has now almost returned to levels seen before the Brexit referendum. One reason for this is that markets have generally calmed since the Brexit shock, which means that global risk perception has declined significantly. What is more, recent US economic data having surprised to the upside has restored investor confidence in an imminent rate hike by the US central bank.”

“A continuation of the positive USD trend now essentially depends on whether the encouraging developments in economic growth and inflation will continue and whether the FOMC will confirm the positive outlook of investors next week. In our view, the US dollar still has remarkable upside potential. After all, market participants still accord a probability of less than 50% to a rate hike this year. Should the Fed really act in 2016 – as we expect – this would still take many investors by surprise.”

“Next week will also get exciting with regard to the JPY exchange rates. The depreciation of the JPY versus the USD in recent weeks was not only due to the general dollar strength. Another factor that has been exerting pressure on the yen is speculation that the Bank of Japan (BoJ) will ease monetary policy further at its meeting next Friday. Since market expectations regarding the BoJ are now quite high – not least because Prime Minister Shinzo Abe gave prospects of “broad, bold measures” after his victory in the upper house elections – there is considerable potential for disappointment here. Should the BoJ ease monetary policy only moderately, or even leave it unchanged, we would probably see a sharp downward correction in USD/JPY.”

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.