In Wednesday’s London session, the USD/JPY pair experienced a significant drop, reaching 149.50, as the Japanese Yen gained strength. This pressure on the asset ensued following reports from the Jiji News Agency, indicating that certain members of the Bank of Japan‘s (BoJ) Monetary Policy Committee (MPC) are leaning towards an exit from the ultra-loose monetary policy stance during the March policy meeting.
Last week, BoJ board member Hajime Takata expressed optimism, stating that the central bank‘s goal of maintaining inflation above 2% on a sustainable basis is “finally in sight.”
The potential for the Japanese Yen to outperform is anticipated if the BoJ decides to lift negative interest rates, which have been in place for over a decade due to the challenge of sustaining inflation consistently above 2%. The key factor contributing to inflation remaining below 2% has been sluggish wage growth. However, with an improving outlook for wage growth, discussions about abandoning the expansionary policy stance have gained traction.
Simultaneously, the US Dollar weakened as market expectations for Federal Reserve (Fed) rate cuts in the June policy meeting increased. According to the CME FedWatch tool, traders now assign a little over a 57% chance for a 25 basis points rate cut in the June meeting, up from around 52% on Tuesday.
Looking ahead, the trajectory of the US Dollar will be influenced by Fed Chair Jerome Powell’s testimony before Congress at 15:00 GMT. Powell is expected to provide fresh guidance on when the central bank will commence interest rate reductions, adding further uncertainty to the currency‘s outlook.
