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31.01.2023 09:07 AM
USD/JPY: US dollar latches on Fed rate increase expectations

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The US dollar tries to take advantage of the upcoming interest rate hike in the US. On Monday, USD/JPY rose by 0.7% and hit the high of 130.5.

The current week will be a very busy one for FX traders. Several central banks will have policy meeting in the next few days, which could dramatically alter the balance of power for major currency pairs.

Tomorrow's Fed monetary policy meeting should be a deciding factor for USD/JPY. Many experts think that dollar bulls will not miss the opportunity to take advantage of it.

Over the past several months, there has been speculation that the Fed might soon roll back or pause its hawkish monetary policy. As a result, DXY lost 1.3% in January alone.

Analysts say traders have already fully priced in the risk of a possible cut by the US central bank. Recently, the dollar has strongly declined against all major currencies and now appears to be oversold.

At its February meeting the Fed is definitely unlikely to hit the brakes and will continue to follow a hawkish course. This means that the US dollar has a real chance to increase against some currencies in the short term.

USD/JPY might actually benefit from tomorrow's rate hike in the US. Most likely, bulls will try to take maximum advantage of an increased monetary policy gap between the US and Japan once again.

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Traders now expect the Fed to slow the pace of rate hikes again and raise the rate by only 25 bps. But even such a minimal step can undermine the position of the slightly weakened yen.

The Japanese currency has been showing signs of weakness against the dollar lately, as its upside momentum has almost run out.

The market has not stopped expecting a hawkish reversal of the Bank of Japan. Many investors have realized that BOJ will not change its policy as long as Haruhiko Kuroda is still in charge.

"Kuroda's defiance and pattern of surprising markets and going against the consensus means we may not get any policy changes at his final meeting in March, and instead leave it to his successor to tighten policy," analyst Matt Simpson noted.

Analysts still see excellent upside potential for the yen in the medium term, but believe that JPY will likely slide down in the very near future.

Bloomberg commented that the US dollar has broken out of the downtrend it has been in against the yen since October, giving USD the opportunity to advance against JPY.

At this stage, USD/JPY traders will need to figure out the Fed's next move. If the rhetoric of the US central bank tomorrow is more hawkish and rumors of a possible pause in the tightening cycle prove to be unfounded, the pair will rise.

If the opposite is the case, USD/JPY might fall sharply and test its recent lows.

Technical analysis of USD/JPY

Despite its recent rally, USD/JPY is currently trading below the 20-day EMA, which is located at 130.57. To continue the uptrend, the pair needs to surpass the EMA, which is used to gauge short-term bias.

Technical indicators such as RoC and RSI are also signaling a possible upward movement as well. The rate of change shows that bulls are gaining momentum and the Relative Strength Index is about to turn bullish.

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