USD/JPY holds onto gains near 157.00 ahead of Fed’s monetary policy
- USD/JPY trades firmly near the two-week high around 157.00 ahead of the Fed’s policy announcement.
- The Fed is expected to cut interest rates by 25bps to 3.50%-3.75%.
- The Japanese economy declined at a faster pace of 0.6% in the third quarter this year, revised data showed.
The USD/JPY pair clings to three-day gains near 157.00 during the European trading session on Wednesday. The pair demonstrates strength even as the US Dollar (USD) trades cautiously ahead of the monetary policy announcement by the Federal Reserve (Fed) at 19:00 GMT, signalling broader weakness in the Japanese Yen (JPY).
As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, ticks down to near 99.10. The DXY trades in a narrow distance from the over five-week low of 98.75 posted last week.
Japanese Yen Price This week
The table below shows the percentage change of Japanese Yen (JPY) against listed major currencies this week. Japanese Yen was the weakest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.10% | 0.18% | 0.96% | 0.13% | -0.12% | -0.21% | 0.15% | |
| EUR | -0.10% | 0.12% | 0.91% | 0.08% | -0.16% | -0.27% | 0.09% | |
| GBP | -0.18% | -0.12% | 0.81% | -0.04% | -0.28% | -0.39% | -0.02% | |
| JPY | -0.96% | -0.91% | -0.81% | -0.79% | -1.05% | -1.14% | -0.77% | |
| CAD | -0.13% | -0.08% | 0.04% | 0.79% | -0.24% | -0.34% | 0.02% | |
| AUD | 0.12% | 0.16% | 0.28% | 1.05% | 0.24% | -0.11% | 0.26% | |
| NZD | 0.21% | 0.27% | 0.39% | 1.14% | 0.34% | 0.11% | 0.37% | |
| CHF | -0.15% | -0.09% | 0.02% | 0.77% | -0.02% | -0.26% | -0.37% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Japanese Yen from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent JPY (base)/USD (quote).
Investors are confident that the Federal Reserve (Fed) will cut interest rates by 25 basis points (bps) to 3.50%-3.75% as the United States (US) job market conditions have remained weak since the start of the year.
Several Federal Open Market Committee (FOMC) members, including Chairman Jerome Powell, have warned of downside employment risks in their latest comments. In late November, New York Fed Bank President John Williams said, "Economic growth has slowed, and the labour market gradually cooled," adding that there is more room for further interest rate cuts.
Apart from the Fed’s interest rate decision, investors will pay close attention to the Fed’s dot plot and Powell’s press conference to get fresh cues on the Monetary policy outlook.
Meanwhile, the Japanese Yen underperforms broadly as rising Tokyo’s fiscal concerns are weighing on Bank of Japan’s (BoJ) interest rate hike bets. On Monday, revised Q3 Gross Domestic Product (GDP) figures showed that the Japanese economy contracted at a faster pace of 0.6% against the preliminary estimate of 0.4%.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.