USD/JPY Forecast: 140.0 broken amid rising Fed rate bets

• The dollar lost around 1.3% against the yen last week.

• News outlets have revealed a high chance for a 50 bps Fed rate cut.

• The Bank of Japan will meet on Friday.

The USD/JPY forecast points to further declines in the dollar due to an increase in Fed rate cut expectations. At the same time, the yen was on top as investors looked forward to the Bank of Japan’s policy meeting.

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The dollar lost around 1.3 percent against the yen last week after reports that the Fed may consider a more significant rate cut at this week’s meeting. Markets were initially convinced that policymakers would vote for a 25 bps cut. Inflation was slightly higher than expected and the job market wasn’t in such terrible shape. Therefore, the US central bank could afford to start cutting interest rates slowly.

However, that outlook changed on Friday when news outlets revealed a strong chance for a 50 bps rate cut. As a result, investors have priced in a higher chance of such an outcome, weighing on the dollar. By Monday, investors had priced in a 59% cut in the 50bps rate. At the same time, total cuts in 2024 increased to 125 bps.

The Fed is poised to cut rates on Wednesday. However, traders are still betting on a rate cut of between 25 and 50 bps. Therefore, whatever size the central bank chooses, it is likely to increase market volatility.

On the other hand, the Bank of Japan is due to meet on Friday this week. Although the BoJ could keep rates unchanged, the messages could be demanding. Recent comments from policy makers have shown that they are willing to keep raising interest rates.

Key USD/JPY Events Today

With a holiday in Japan and no key events in the US, price could extend last week’s move.

USD/JPY Technical Forecast: Bullish RSI divergence fails

Technically, USD/JPY made a new downtrend low after breaking below the 141.01 support level. This reinforced the bearish trend as the price fell well below the 30-SMA with the RSI in the oversold region.

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Previously, the price had stopped at the level of 141.01. Here, the RSI indicated a bullish divergence, signaling a reversal. However, when the bulls took control, they failed to breach the 30-SMA, a sign that the bears remain on top. This downtrend could soon reach the 139.02 support level.

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