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Summary: Following the Federal Reserve's interest rate decision, the market's focus is shifting toward the Bank of Japan's (BOJ) upcoming announcement. Friday is expected to be a busy day for the Japanese yen, as the USDJPY bulls face significant challenges.

Fundamentals

Despite inflation staying above the Bank of Japan's 2% target for over a year, BOJ Governor Haruhiko Kuroda vows to maintain an ultra-loose policy until he is more certain that the economy can withstand global headwinds and allow businesses to continue raising wages next year.

As the aggressive rate hikes in the U.S. seem poised to conclude, the BOJ faces its own tricky decision this week on whether to take further steps to gradually unwind the controversial yield-curve control (YCC) plan.

During the two-day meeting that concludes on Friday, the market currently expects the central bank to retain its short-term interest rate target of -0.1% and the 10-year government bond yield target at 0% under the YCC framework.

However, insiders familiar with Governor Haruhiko Kuroda's thinking suggest that the board could discuss minor tweaks to the policy, such as expanding the range of subsidies set around the 10-year yield target, if it believes YCC's costs are starting to outweigh its benefits.

To mitigate the drawbacks of YCC, the BOJ expanded the range around the yield target in December last year, allowing the 10-year yield to rise by up to 0.5%, thereby easing the pressure on banks to absorb massive amounts of bonds to defend their interests.

Since the BOJ will maintain negative short-term interest rates, adjustments to the upper limit of the yield or subsidy range are unlikely to trigger a surge in borrowing costs, thus severely harming the economy.

However, due to historical challenges of premature monetary tightening leading to prolonged deflation, many BOJ policymakers remain cautious about pulling the trigger too early, which could signal a shift in corporate pricing and wage-setting behaviors.

Internally, there is no consensus among the board members on how quickly the BOJ should withdraw stimulus measures. According to recent policy meeting minutes, while only one member called for an early adjustment to YCC, others emphasized the need to patiently maintain stimulus.

Inflation will be the key factor determining when the BOJ achieves full policy normalization. The market environment is critical in terms of adjusting YCC, and the BOJ may not be able to wait for too long. With the BOJ conducting substantial bond purchases, market liquidity remains thin. The ultra-low interest rates in Japan drive the depreciation of the yen, raising import costs. Therefore, we expect the BOJ to eventually modify YCC, but for now, they are likely to maintain the status quo on Friday.

Technical Analysis

The Fed's interest rate decision and Fed Chairman Powell's press conference put the U.S. dollar at a disadvantage. On Wednesday, the USDJPY pair declined by 0.46% overall, closing at 140.23.

Nevertheless, the daily chart indicates that the USDJPY pair is still lingering below the 141.20 resistance level. Despite three consecutive days of declines, the asset remains above the 50-day and 200-day SMAs. Notably, the 50-day SMA has further distanced itself from the 200-day SMA during the European session, signaling a short-term stabilization and a potential end to the downward trend.

However, in the 4-hour chart, the asset faces strong resistance at the 140.50 level. Meanwhile, the relative strength index (RSI) has generated a bearish signal, indicating that selling pressure is greater than buying pressure. A breakthrough of this level could shift the risk towards the upside.

Overall, for this asset, an expanded target range would provide some relief; however, further gains may largely depend on the U.S. dollar's response. If the expectations of a Fed rate cut or an extended pause do not materialize, adjustments to the YCC policy may not be sufficient to prevent the yen from revisiting the 148.00 level or even higher. In terms of trading, a buy-on-dips approach is recommended.

Trading Recommendations

Trading Direction: Long

Entry Price: 140.00

Target Price: 143.82

Stop Loss: 137.20

Valid Until: 2023-08-10 23:55:00

Support: 139.10, 138.03, 137.68

Resistance: 141.18, 141.75, 143.00