USDJPY sellers underestimate Fed’s tough stance

USDJPY saw a sharp decline during yesterday's trading session, ending below the 156 level. However, by the end of Wednesday's session, most of the decline had been erased, and today the bulls liquidated the last remnants of yesterday's decline. Another attempt to strengthen the yen against the dollar failed, confirming the fundamental weakness of the Japanese currency. In such a situation, USDJPY buyers may push the pair a bit higher, towards the 157.7 level.

Yesterday's downtrend in the dollar was caused by the US inflation report for May. The rate of price growth slowed more than expected for both the headline and core indicators. Market participants hoped that this positive statistic would soften the rhetoric of Fed officials, who held a monetary policy meeting a few hours later. However, Fed officials are still in no hurry to change their hawkish stance.

Speaking to reporters, Fed Chairman Jerome Powell continued to insist on the need to monitor incoming economic data. The transition to lower interest rates in the US is possible only in the event of a stable trend of slowing inflation. Moreover, according to the regulator's new forecast, there will be only one round of monetary easing before the end of 2024. The Fed's previous forecast was 3 rate cuts.

Meanwhile, the Bank of Japan is preparing for its meeting tomorrow. According to the consensus forecast, the level of interest rates will not be changed, but there may be a reduction in bond purchases. Now the Japanese regulator buys debt securities for 6 trillion yen ($38 billion) a month. According to Reuters analysts, the volume of purchases may be reduced by 15%, but it will not have a big impact on the yen. The only way the Japanese currency could strengthen significantly would be if quantitative easing was completely abandoned, but the country's huge public debt makes this scenario highly unlikely.  

The next target for USDJPY buyers will be the local highs from the end of May, near the 157.7 level. A more significant rise in prices can't be ruled out, but the possibility of intervention by the Bank of Japan makes it too unreliable.

Consider the following trading strategy:

Buy USDJPY at the current price. Take profit – 157.7. Stop loss – 156.