USD/JPY Outlook: Powell’s dovish comments send the dollar up

• High interest rates could lead to more cracks in the US labor market.

• US inflation is likely to reach the 2% target sustainably.

• The BoJ will continue to tighten monetary policy.

The USD/JPY outlook paints a pessimistic picture as the greenback tumbles after Powell’s strong dovish tone. Meanwhile, the yen strengthened after BoJ Governor Kazuo Ueda said the central bank would raise rates if inflation rose as expected.

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Political perspectives in Japan and the US diverged again. However, this time it is in favor of the yen. Minutes from last week’s FOMC meeting revealed that policymakers are ready to start cutting interest rates. However, Powell’s tone on Friday was more conciliatory and his guidance clearer.

According to him, inflation is likely to reach the 2% target sustainably. Meanwhile, high interest rates could lead to more cracks in the labor market. Therefore, it is time for the Fed to adjust its policy. A pivot from high interest rates to rate cuts will likely mean a weaker dollar. At the same time, there will be less incentive to hold high-yielding US assets when the Fed starts cutting rates. This will therefore lead to an unwinding of the popular carry trade, boosting the yen.

At the same time, the Bank of Japan is moving towards a more dovish outlook. Initially, there were fears that the market turmoil witnessed after the first interest rate hike would put a pause on the policy adjustment. However, BoJ Governor Kazuo Ueda dismissed these fears.

Ueda said that as long as inflation rises as expected, the central bank will continue to tighten monetary policy. As a result, the yen will strengthen and the interest rate gap between Japan and the US will narrow.

Key USD/JPY Events Today

It will be a slow start to the week with no key events. Therefore, investors will continue to digest Friday’s political remarks.

USD/JPY Technical Outlook: Bears target 142.56 amid rising momentum

From a technical point of view, the price of USD/JPY finally turned lower, breaking away from the 30-SMA and the 0.382 Fib level. Therefore, the bearish trend consolidated with the price well below the SMA and the RSI almost oversold.

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Bears are now heading towards the 142.56 support level. A break below this level will reinforce the bearish trend and lead to lower prices. On the other hand, if the level holds, the price could break or vice versa.

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