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

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