US central bank officials affirmed the continuation of the US interest rate hike policy. This is in return for Japan's abandonment of intervention to prevent a further collapse of the Japanese yen exchange rate in the markets amid an accommodative monetary policy. It still supports the upward path for the USD/JPY currency pair, which yesterday tested the 142.37 resistance level, before settling around 141.70 at the time of writing.
After a widely expected pause last week, the Fed is likely to resume raising US interest rates later this year, Federal Reserve Chairman Jerome Powell said, during testimony before the House Financial Services Committee on Wednesday. In prepared remarks, Powell reiterated that the Fed will likely continue to raise interest rates in an effort to contain stubbornly high inflation. “Almost all FOMC participants expect it will be appropriate to raise interest rates somewhat by the end of the year,” Powell said.
The Federal Reserve left US interest rates unchanged last week, but the central bank's latest projections indicate that it plans to resume raising interest rates later this year and expects a rate of 5.6 percent by the end of 2023. If the Fed decides to return to its recent increases of a quarter point, expectations are that the central bank will raise interest rates two more times this year.
Expectations of additional interest rate hikes come as Powell noted that inflation pressures continue to rise and said the process of returning inflation to the Fed's 2 percent target still has "a long way to go."
Powell acknowledged that inflation has eased somewhat since the middle of last year, but pointed to the Fed's preferred inflation measure showing that core consumer prices, which exclude food and energy prices, were still up 4.7 percent year-on-year in April. "We've seen the effects of our policy tightening on demand in the most interest rate sensitive sectors of the economy," Powell added. “However, it will take time for the full effects of monetary restrictions to materialize, especially on inflation.”
CME Group's FedWatch tool currently indicates a 76.9 percent chance that the Fed will raise interest rates by another quarter point after its next meeting in late July. In his remarks, Powell also briefly touched on the state of the banking sector, describing the US banking system as “sound and resilient.” Powell also said: "The recent bank failures, including that of the Silicon Valley bank, and the resulting banking stresses have underlined the importance of ensuring that we have the appropriate supervisory rules and practices in place for banks of this size." He added, “We are committed to addressing these weaknesses to create a stronger and more resilient banking system.”
Dollar expectations against the Japanese yen today:
- There is no change in my technical view of the performance of the currency pair, as the general direction of the USD/JPY currency pair is still bullish.
- It surpassed the resistance level of 142.00, which still confirms the dominance of the bulls.
- It moves the technical indicators towards strong overbought levels.
The continued divergence in the future of the US Federal Reserve's hawkish policy and the Japanese Central Bank's accommodative policy will support the trend for a while unless there is a sudden intervention from Japan in the markets to prevent a further collapse of the Japanese yen. The bulls' closest targets are currently 142.40 and 143.00, respectively.
On the other hand, there will be no first breach of the trend without stability below the support 139.30, according to the performance on the daily chart below.
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