Forex Market: USD/JPY mostly steady ahead of Fed rate decision, BOJ policy makers view wage raises as key to outlook

Having touched a two-week low last Friday, USD/JPY remained mostly flat in early European session on Tuesday, as markets awaited another interest rate hike from the Federal Reserve tomorrow.

Futures data hints at a 75 basis point rate hike and a 10% risk of a 100 basis point move.

Market players have also been trying to determine if or when the Fed may shift its focus away from inflation, as signs of a slowing economy have already begun to emerge, providing support to the safe haven US Dollar.

“I don’t think the market’s got a very good, confident feel that it’s going to be one flavour of surprise or the other,” Imre Speizer, an analyst at Westpac, was quoted as saying by Reuters. “Which is enough to hold the dollar in place.”

Meanwhile, the minutes of Bank of Japan’s June meeting showed that policy makers viewed wage raises as key to sustainably achieve their 2% inflation objective.

Board members agreed that ultra-accommodative policy settings were still required, so that the economy could weather the impact from surging commodity prices and COVID-19 lockdown-related supply disruptions.

“The board agreed that uncertainty surrounding Japan’s economy was extremely high,” BoJ’s minutes stated.

“Many members spoke about the importance of wage increases from the perspective of achieving the BOJ’s price target in a sustained and stable fashion.”

In June, Bank of Japan kept the -0.10% target for short-term interest rates and stuck to its guidance to maintain borrowing costs at “present or low” levels.

The central bank also pledged to defend its cap on 10-year Japanese government bond yields through unlimited buying. The BoJ aims to keep benchmark 10-year yields within 0.25% of its 0% target.

Japan’s annual core CPI inflation accelerated to 2.2% in June, surpassing the central bank’s target, mostly because of rising fuel and commodity prices.

At the same time, inflation-adjusted real wages decreased 1.8% year-on-year in June – the largest YoY slump in almost 2 years.

“The BOJ must maintain monetary easing until wage hikes become a trend, and help Japan achieve the bank’s price target sustainably and stably,” one BoJ board member was quoted as saying.

As of 8:12 GMT on Tuesday USD/JPY was inching down 0.04% to trade at 136.580. Last week the major Forex pair slipped as low as 135.569, which has been its weakest level since July 8th (135.323).

USD/JPY has risen 0.67% so far in July, following another 5.48% gain in June.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 136.44
R1 – 136.98
R2 – 137.33
R3 – 137.88
R4 – 138.43

S1 – 136.09
S2 – 135.54
S3 – 135.19
S4 – 134.84