Another round of tightening by the U.S. Federal Reserve is expected this week. However, this factor isn't actually inspiring for the USD/JPY pair right now. Analysts believe that the market has already considered the quarter point rate hike and this factor is unlikely to trigger a sharp rise in the dollar.
The USD is down, the yen is up
At the end of last week, the yen strengthened against the dollar by 2.5%. Two factors contributed to such a significant rise in the Japanese currency.
On the one hand, the JPY has grown as a safe haven asset amid increasing market panic over the global banking crisis.
On the other hand, the yen grew as bets mounted for a less hawkish Fed.
The next meeting is scheduled for March 21-22. Now most traders expect that the US central bank will raise rates again by only 25 bps.
There is also an opinion that the Fed may take a forced pause in the current tightening cycle in order not to further aggravate the situation in the banking sector.
Recall that the Fed's aggressive monetary policy has already led to the actual bankruptcy of 3 credit institutions in the U.S. and put other financial institutions in the country at risk of collapse.
Also last week, the risk of affecting others in the banking sector spread to Europe. One of the oldest banks of Switzerland - Credit Suisse appeared on the verge of default.
Worries that the problem could take on a global scale have forced investors to radically rethink their views on the future monetary policy of major central banks.
Markets now expect that, in light of recent events, some central banks may pause, slow down, or roll back tightening altogether.
Less hawkish market sentiment has led to a sharp decline in bond yields around the world, including in the U.S. Last week, 2-year U.S. bond yields posted their biggest loss in 3 years and yields on their 10-year counterparts collapsed to their lowest level since early January.
The main beneficiary of the decline in U.S. government bond yields was the Japanese yen. Over the past few days, the pair lost almost 300 points, which led to a strong drop in the DXY index.
According to the results of the last seven days, the greenback showed the worst dynamics in 5 weeks, and its future prospects are now extremely uncertain.
Analysts believe that the dollar's direction should be set by the Fed's March meeting, which will be held on Tuesday and Wednesday.
At the same time, the rate hike will not be decisive, since it is already more embedded in the current value of the dollar.
A more important trigger for the greenback will be the Fed's forecast for the banking sector and the US economy, as well as the trajectory of interest rate hikes in the future.
How can the USD/JPY exchange rate change this week?
Most currency strategists now see the potential for further decline in the USD/JPY pair. The continuation of the bearish trend is evidenced by both the fundamental and the technical picture.
According to Bloomberg analysts, the upcoming FOMC meeting is unlikely to support the dollar, as US officials are likely to be as cautious as possible in their forecasts, so their rhetoric may be interpreted by the market as less hawkish.
With US inflation still resilient, experts believe that the Fed will not pause in March, but may warn of a possible suspension of tightening if the situation in the banking sector goes further out of control.
Despite a number of preventive measures that the US government has taken over the past few days, there is still a high risk. This fact will certainly be taken into account by members of the Fed when making forecasts for interest rates.
Analysts do not rule out that the new dot plot, which reflects individual expectations of US officials regarding rates, may show a lower-than-predicted federal funds rate in 2023.
In this case, the dollar is likely to go into free fall in all directions. According to analysts' forecasts, USD/JPY may fall below the round figure of 130 in the coming days amid weakening hawkish market expectations.
From a technical point of view, the pair also looks very vulnerable. The declining 10-period exponential moving average (EMA) at 132.35 indicates that the downward momentum is extremely strong.
On top of that, the Relative Strength Index (RSI) has fallen into a bearish range of 20.00-40.00, indicating further weakness.
However, we should not totally discount the opposite scenario, especially now that there are also some prerequisites for the dollar's further growth.
Last weekend, several major global central banks, including the Fed, announced a joint operation to provide liquidity to banks through permanent agreements on swap lines in U.S. dollars.
If the Fed declares that the situation in the banking sector is completely under control and should not affect its plans for tightening, it may cheer up the US currency.
An updated dot plot could provide an even better momentum for the dollar. If the Fed's dot plot signals continued U.S. tightening and higher interest rates, the greenback will rise on all fronts.
However, most analysts see a low probability of such a development. For the dollar, which has already come to terms with the fact that the tightening might come to a halt or end at any time, such a scenario would be akin to a miracle.
From a technical point of view, it is unlikely for the pair to rise in the near future. The dollar bulls can regain the upper hand only if the pair climbs above the 38.2% Fibonacci retracement at 133.83. That would provide a quick path to the March 15 high at 135.11.