The dollar-yen pair continues to sway from side to side, as the market is growing uncertainty around the future policy of the Federal Reserve. But how long will this flat last and how will it end?
Yesterday's chaotic dynamics of the USD/JPY asset perfectly conveys the current market mood. It seems that traders are completely confused about the plans of the US central bank and are waiting for any clues about further rate hikes in the US.
The trouble is that these tips turn out to be very contradictory and bring even more confusion to the ranks of investors, which affects the movement of dollar majors.
Last week's US inflation data almost convinced market participants that the Fed may soon begin to take less aggressive action.
However, hawkish comments by US officials this week have backfired.
Most members of the Fed remain combative about inflation, even though there are very strong signs of a slowdown on the horizon.
So, yesterday the President of the Federal Reserve Bank of Kansas City Esther George said that it is too early to relax, because the increase in prices is still high.
The same opinion was voiced by her colleague Mary Daly, who, by the way, is considered one of the most dovish speakers of the Fed. The official stressed that currently a pause in rate hikes is not even discussed.
The hawkish rhetoric helped the dollar stabilize a bit. On Wednesday, the DXY index found support at 106.31 after falling to 105.3 a day earlier.
As for the USD/JPY pair, it was trading flat yesterday. The quote fluctuated between a high of 140.29 and a low of 138.72.
According to many experts, the current consolidation of the major may take a long time. Bulls and bears will continue to pull the price rope until they receive a specific signal from the US central bank.
Most likely, this will not happen before the next Fed interest rate meeting, which is scheduled for December 14th. This event will serve as a key trigger for the asset and determine its further direction, analysts say.
Now most traders are leaning towards the fact that the Fed will raise rates in December not by 75 bps, but by only half a percentage point. If the forecast comes true, the dollar's position will be greatly shaken.
An even bigger blow for the greenback could be the second consecutive decline in the core US consumer price index.
"If by the end of November we again see a significant slowdown in inflation, the final level of the rate is likely to be revised downward, down to 4.50%," Credit Suisse analysts predict. - In this case, by the end of the fourth quarter, the dollar may fall against the yen to 138.00, and in the long term - to the level of 133.10.
J.P. Morgan analysts also predict the end of the upward trend for the USD/JPY pair if US rates do peak in the near future.
In their opinion, in this scenario, this dollar major will suffer more than the others, because it was the main beneficiary of the aggressive anti-inflation campaign that the Fed launched this year.
Recall that since January, the yen has dipped against the greenback by more than 20%. This is the worst performance among all the currencies of the Group of 10.
The JPY was the biggest loser of the year due to strong monetary divergence between Japan and other economies. While most major central banks have taken a hawkish stance this year, the Bank of Japan has remained the only supporter of low interest rates.
In recent days, when there is a high probability that the key political opponent of the BOJ, the Fed, may soon move to a less aggressive rate, the yen has received very strong support.
Now its future is in the hands of American politicians. Experts believe that, in the event of a sharp slowdown in US tightening, the USD/JPY pair risks losing almost half of its annual growth.