The Federal Reserve is expected to lift benchmark interest rates by a quarter of a percentage point at Wednesday’s policy meeting, widening the rate differential between those in the U.S. and other developed economies like Japan. It is a differential that may deliver a fillip to the dollar against the yen after a bearish stretch versus the Japanese currency for greenbacks, an analyst said.
The Fed’s anticipated interest-rate increase on Wednesday would mark its seventh since December 2015 and underscore the U.S. central bank’s path toward normalizing its monetary policy as central bankers of developed economies elsewhere are notably behind the postcrisis, monetary-policy curve.
Indeed, while the fed-funds futures——used to bet on expectation for rate increase—point to a greater than 90% probability that Jerome Powell’s Fed will hike rates to a range between 1.75%-1.75%-2%, its peers are expected to keep their rates on hold.
Notably, Japan has been wrestling with stubbornly low inflation that last read 0.6% in April, underperforming both expectations and the previous level, highlighting the BOJ’s elusive search for its annual inflation target at 2%.
Another Fed hike could likely push the dollar higher versus the yen
increasing the appeal for traders of parking funds in dollars and dollar-based assets, which are offering comparatively richer rates.
That said, the key question was still how many more rate hikes we can expect in 2018, said Fawad Razaqzada, market analyst at Forex.com.
Recent economic data from the U.S. has been supportive, possibly supportive enough to have nudged the needle from the expected three interest rate hikes in 2018 to a total of four, he added. The first one was delivered in March.
Inflation data Tuesday showed May CPI grew at the fastest pace in six years to 2.8% on an annualized basis, for example. Market participants see that data as giving the Fed even greater confidence to dial up interest rates.
So, where would that put the yen-dollar in the near term?
Should the so-called dot plots, a chart of future interest rate expectations by Fed members, point to more hikes than anticipated, “dollar-yen could potentially resume its rally from end of March and make another attempt at breaking its long-term bearish trend line in the ¥110-¥112 region,” Razaqzada said.
The greenback last bought ¥110.38. On the other end of the spectrum, investors should watch out for support levels around ¥109.85, and should it slip lower ¥109 and ¥107.30.
“If and when this resistance area is eroded only then will the bias turn decisively bullish,” Razaqzada argued. “But while it remains below this area, the technical bias remains neutral.”