Market Data 
- USD/JPY slides below 142.00 as firm speculation for Fed large interest rate cuts weighs on the US Dollar.
- Market participants expect the Fed to cut interest rates by 100 bps this year.
- Investors expect the BoJ to maintain interest rates steady at 0.25% on Friday.
The USD/JPY pair drops below 142.00 in Wednesday’s European session. The asset faces selling pressure after a recovery move to near 142.47 as the US Dollar (USD) slumps ahead of the Federal Reserve’s (Fed) monetary policy announcement at 18:00 GMT.
The market sentiment remains cheerful as the Fed is almost certain to start reducing interest rates. S&P 500 futures have posted decent gains in European trading hours. The US Dollar Index (DXY), which tracks the greenback’s value against six major currencies, falls back to near 100.70 from Tuesday’s pullback move to 101.00. However, 10-year US Treasury yields jump above 3.67%.
While the Fed is poised to cut interest rates, investors will keenly focus on the potential rate cut size and the dot plot, which shows where policymakers see Federal Fund rates heading in short and long term.
According to the CME FedWatch tool, the likelihood of the Fed reducing interest rates by 50 basis points (bps) to 4.75%-5.00% has increased to 63% from 14% a week ago. For the year-end, traders expect that the Fed will cut interest rates by 100 bps. This suggests that the Fed will cut interest rates by 50 bps in one of its three meetings remaining this year.
In Asia, the Japanese Yen (JPY) will be influenced by the Bank of Japan’s (BoJ) monetary policy decision on Friday. The BoJ is widely anticipated to leave interest rates unchanged at 0.25%, with a hawkish guidance due to steady economic growth and the stability of inflation above 2% for the straight 21 months.
Last week, BoJ policymaker Naoki Tamura projected interest rates to rise at least 1% as early as the second half of the next fiscal year.
Meanwhile, Japan’s economic assessment report for September, released on Wednesday, showed that the economy is recovering moderately although it is still pausing in parts, Reuters reported.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
