BoJ’s Historical Approach

The Bank of Japan (BoJ) has a history of using very loose monetary policy to increase domestic demand. In contrast, the US Federal Reserve has kept interest rates high to fight inflation. These different strategies are being reconsidered as worries about fiscal issues and credit ratings affect the strength of the US Dollar. Markets are adjusting expectations for possible interest rate cuts by the Fed this year. The Japanese Yen is making a comeback as a safe-haven currency due to concerns about fiscal responsibility in the US. If Ueda hints at tightening policies, the Yen could gain strength by narrowing the interest rate gap and increasing confidence in the currency. Currently, the USD/JPY is facing renewed downward pressure, influenced by last week’s changes in US Treasury yields and a global move towards safer assets. The drop below 143.00 is more than just a technical indicator; it reflects a change in market sentiment and a shift away from recent trends. As risk aversion increases, short-term trades are highly sensitive to news about inflation and interest rates in both the US and Japan.

Federal Reserve Stance

Ueda’s upcoming speech is attracting more attention than expected. Although he usually avoids making bold policy announcements, any hints—especially regarding the labor market or domestic spending—will be closely analyzed for signs that Japan may further ease its yield curve control. Long-term Japanese bonds have been steadily changing, and a clear stance from the BoJ could draw investment back to the Yen, creating pressure on the currency pair from Japan. The Federal Reserve’s position is still unclear. While inflation has decreased from its highs, core levels remain resistant in some areas of the economy. Powell’s team has not given strong indications about reducing interest rates, and ongoing budget concerns increase the demand for safe-haven assets. This trend is becoming visible in the bond markets, with long-term yields slightly rising as investors reconsider public spending risks. This situation could indirectly support the Yen, especially if Japanese authorities reduce their intervention efforts. We anticipate that the gap between US and Japanese yields will remain narrow in the short term, particularly if the Fed stays cautious about easing policies. This makes carry trades less appealing and may lead to a reduction of USD/JPY long positions that were built with the expectation of continuous strong US economic performance. Create your live VT Markets account and start trading now.

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