USD/JPY momentum turns lower as the BOJ hike rates to a 17-year high

The BOJ delivered the full 25bp hike as expected, which takes their interest rate to a 17-year high of 0.5%. Data released a few hours before the BOJ’s hike showed that Japan’s core CPI rose to a 16-year high, and the BOJ cited the fact that many firms have said they will continue to raise rate this year. And it is these growing wage pressures which have forced the BOJ to increase their price forecasts for fiscal year 2025 and 2026.

The hike may have been expected although their outlook was relatively hawkish. And that keeps the door open for another 25bp hike by the year end, or dare we say a third is also possible to see an interest rate of 1%. All in all, this is nothing short of a hawkish hike.

Yet that was not enough to deliver the levels of volatility suggested by options markets. Implied volatility spiked for USD/JPY ahead of the meeting, with the 24-hour IV band rising to 250% of its 20-day average. Yet the reaction for FX markets has been muted, with currency pairs all remaining well within their average daily ranges.

Ultimately, we needed a surprise dovish hold to see such levels of volatility. For now, the yen is strengthening alongside JGB yields, but not by a huge amount. We may need to see Trump take aim at the strong USD to really see some downside momentum for USD/JPY.

USD/JPY technical analysis

The reaction may have been tame relative to expectations for USD/JPY, but a bearish case continues to build to my eyes. The initial leg lower from the January high has paused into a potential bear flag, and momentum is turning south within it. If successful, the bear flag projects an approximate downside target at 154.66, although take note of the 200-day SMA (152.80), 153 handle and high-volume node (HVN) at 153.72 that could provide support along the way.

The 1-hour chart shows bears are now dominating the session after the initial spike higher at the BOJ’s rate decision. Yet the RSI (2) is heavily oversold, so bears run the risk of piling into a cycle low if they’re not careful. We also have flash PMI data for the US later today which is likely to be strong, so a bounce for USD/JPY is not out of the question. Yet given clues from higher timeframes, the hawkish BOJ and prospects of Trump trying to strongarm the Fed into lower rates, my bias remains to fade into rallies on USD/JPY for a move to ~153.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.