Will the yen continue to weaken? The Bank of Japan's decision is crucial!

On Wednesday (January 22), the US dollar/Japanese yen (USD/JPY) was trading at 156.054 in today's latest market quotations, rising 0.37% during the day. The yen continued to weaken, away from the one-month high hit the previous day. Current market movements suggest that risk appetite remains dominant, especially the divergence in policy expectations between the Federal Reserve and the Bank of Japan (BoJ), further limiting the downside of the yen. As the Bank of Japan's policy meeting approaches this week,Aohui official websiteMarket participants are keeping an eye on the upcoming policy decision, which could have a significant impact on the yen.

The hawkish signals from the Bank of Japan compared with dovish expectations from the Federal Reserve

The weakness of the yen is constrained by policy differences between the central banks of the United States and Japan. The dovish stance of the Federal Reserve contrasts sharply with the hawkish attitude of the Bank of Japan. The Fed has been inclined to cut interest rates recently, especially as US inflation is gradually easing, and the market is widely expected to make two rate cuts later this year. The Bank of Japan is expected to raise interest rates at this week's meeting, possibly raising the policy rate from 0.25% to 0.5%. If the decision to raise interest rates goes ahead, it will be the highest level since the 2008 global financial crisis.

Shigeru Ishiba, Japan's prime minister, is expected to highlight strong wage growth as a centerpiece of his economic revival strategy in a policy speech to parliament. This argument is also supported by Japan's largest trade union, Unite, whose leader Tomoko Yoshida said strong wage growth provided strong support for the Bank of Japan to raise interest rates. Moreover, the annual labor negotiations that began this week between Keidanren, Japan's largest business lobby, and unions also foreshadow further wage increases, further strengthening market expectations for the Bank of Japan to raise interest rates.

Risk appetite continues to weigh on yen demand

While expectations of a rate rise by the Bank of Japan remain strong, overall market sentiment remains skewed towards risk appetite. Positive sentiment in the stock market further weakened the safe-haven demand for the yen, which supported the dollar against the yen. In the absence of major economic data, market sentiment continued to remain optimistic, which pushed the dollar higher against the yen, although the yen may be oversold in the short term.

In addition, recent producer price index (PPI) and consumer price index (CPI) data in the United States suggest that inflation in the United States has cooled, strengthening expectations for further interest rate cuts by the Federal Reserve. The Fed's dovish stance contrasts with the hawkish policy of the Bank of Japan, driving the dollar higher against the yen.

Technical aspects: The downside of the yen is limited, and key resistance levels need to be broken through

From a technical point of view, the USD/JPY is still showing strong support. The pair has found support in the 154.75 zone on several occasions, which is the low of the past month, and continues to run within the rising channel that has been rising for more than a month. Despite the short-term correction, the oscillators on the daily chart still do not show significant negative momentum, indicating that the yen lacks sufficient selling power in the short term.

The short-term upside resistance is in the 156.25 area, which was the volatile high earlier in the week. If this resistance is broken, the next target may be the 156.55-156 area, which represents the high of the week. If the upward momentum holds, the USD/JPY may continue to rise, targeting the 157.00 area and extending further towards the 157.25-157 area. If the above resistance of 157.60 is broken, the USD/JPY may re-test the multi-month high near the 159.00 area, which was touched on January 10.

On the downside, 154.75 remains the key support level, followed by the 154.50-154 area, which could act as a barrier to the yen rally. If the price continues to fall below the lower boundary of the ascending channel, it could accelerate the downside, targeting the 153.00 area. However, whether there is such a pullback in the yen still needs to be closely watched for the policy decision of the Bank of Japan.

Outlook: Bank of Japan resolution could be a short-term turning point

Looking ahead, the Bank of Japan's policy meeting this weekend will be the focus of market attention. At present, the market has fully digested the expectation of more than 90% interest rate hike. If the Bank of Japan confirms a rate hike to 0.5%, it may provide some support for the yen in the short term. However, in the medium term, the rise of the yen may be limited as the Federal Reserve remains biased towards easing policy.

Overall, the dollar still has room to rise further against the yen in the short term, despite the twin pressures on the yen from risk appetite and policy differences between the US and Japan. Traders will be closely watching the Bank of Japan's policy decisions this week, particularly whether it can live up to its expectations for rate hikes. If rate hikes materialize, the yen could see a short-term rally, but in the broader macroeconomic context, the uptrend of the dollar against the yen could be extended.

At the time of writing, the dollar was trading at 156.054 against the yen, up 0.37% during the day.