USDJPY is pushing toward 150 ahead of a big Wednesday, as both the Bank of Japan and Federal Reserve board meetings conclude. Both central banks are expected to hold rates steady, but their agendas will differ significantly. 

The Federal Reserve faces the challenge of navigating recent shifts in economic policy. Trump’s economic policies are expected to have both inflationary effects and potentially negative impacts on growth. Even Bessent has not ruled out the risk of a recession. Normally, such conditions might prompt the Fed to cut rates, but the inflationary impact of tariffs complicates this decision. The Fed’s path this year will be difficult. As a result, the FOMC projections will carry extra weight tomorrow. Our view is that the Fed will likely revise its growth forecast downward and its inflation forecast upward. This stagflationary outlook could create volatility in the dollar index without a clear directional trend but will likely be negative for the U.S. stock market, but how much is already priced in is uncertain. 

In contrast, the Bank of Japan’s focus will be more on potential rate hikes rather than cuts like the Fed. Japan’s inflation has reached 4% and has remained above 2% since early 2022. Early reports from key wage negotiations indicate a 5.46% wage increase, higher than last year’s 5.10% and well above both current inflation and the BOJ’s target. This alone could justify a rate hike. However, the bond market is signaling caution: the 10-year breakeven rate is around 1.60%, rising but still below the 2% target. Governor Ueda remains unconvinced that underlying inflation has reached sustainable levels, so the BOJ is likely to continue its steady approach, aiming to meet its target without risking runaway inflation. The BOJ will likely hold rates tomorrow, but the key thing to watch is whether they signal a potential rate hike for the upcoming meetings. 

(USDJPY) 

USDJPY has lost its long-term upward momentum and has been moving sideways since mid-2023, fluctuating between 140 and 160 with minimal divergence. In the medium term, the pair is trading within a downward channel and is currently attempting to break above the upper boundary of that channel. 

Following a hidden positive RSI divergence, the RSI downtrend has broken, and the oscillator is now testing the 50 level, coinciding with USDJPY’s test of the channel resistance. If the Bank of Japan signals rate hikes for upcoming meetings or adopts a hawkish tone, this test of the channel’s upper boundary is likely to fail, potentially triggering a move towards the 145 level. 

For any sustained upward movement, USDJPY must first reclaim and hold above the 200-day moving average.