Fed policy easing does not guarantee further USDJPY decline

The USDJPY currency pair met yesterday's Fed meeting near the yearly low. On the fact of the long-awaited rate cut traders tried to strengthen the onslaught on the dollar, but all the drawdown by the end of Wednesday's trading session was bought back. Today, the bulls are already insisting on strengthening the U.S. currency, almost bringing USDJPY quotes to the level of 144. Such price dynamics may seem illogical, but it can be clarified with a detailed study of yesterday's events.

Although the easing of the Fed's monetary policy by 0.5% is nominally considered clearly dovish, Reuters analysts don’t quite agree with this view of market participants. They pay attention to the regulator's updated forecast. Based on it, the cycle of rate cuts will be faster than it was expected in June. At the same time, the level of the neutral rate, which the cost of borrowing should reach eventually, was raised to 2.9% from 2.8%. In other words, the pace of policy easing will accelerate, but the scale of this easing will be more modest.

Experts surveyed by Bloomberg expect at least a temporary halt of the USDJPY downtrend. Akira Moroga, chief market strategist at Aozora Bank, called the level of 140 yen per dollar a key support until the end of 2024. From his point of view, the U.S. currency could show a strong rebound against its Japanese counterpart in case of a soft landing of the U.S. economy. This is due to the large gap in the level of rates between the countries.

Reuters experts are confident the key rate won’t be changed at tomorrow's meeting of the Bank of Japan. They point to the regulator's unexpected rate hike in late July, which led to a sharp strengthening of the yen and the collapse of the country's stock market. Considering these factors, the Bank of Japan will endeavor to prevent the summer events from happening again. Market participants don’t expect a tightening of monetary policy in Japan at least until December, which opens the possibility for local strengthening of the dollar against the yen.

In the near future, USDJPY quotes have a good chance of retesting the level of 144. The renewal of the annual lows is postponed to a later date.

The following trading strategy can be suggested:

Buy USDJPY in the range of 142–142.5. Take profit — 144. Stop loss — 140.5.