Dollar and yen face off ahead of major central bank decisions

USD/JPY has been trading around a critical technical level on Wednesday, exactly a week ahead of major central bank decisions by the US Federal Reserve and the Bank of Japan (BoJ), both of which are scheduled to be announced on September 21. Prior to those two key decisions, the Swiss National Bank and Bank of England are also slated to reveal their own monetary policy decisions this week, but they have been less eagerly anticipated because of the broad market consensus that both will hold their respective policies steady.

As it currently stands, the Fed and BoJ are shaping up to be somewhat less predictable. Of course, the market’s view of the probability of a Fed rate hike next week continues to be exceptionally low at around 15%. However, key Fed speakers in recent weeks have given mixed messages with respect to the Fed’s position and perspective. Some have argued for a sooner rate hike, even citing the distinct possibility of one occurring in September, while others have been more dovish. The latter includes the last speaker before next week’s FOMC meeting, Fed Governor Lael Brainard. who cautioned on Monday against raising interest rates too quickly.

As for the BoJ, reports last week that Japan’s central bank was considering more monetary easing and cutting rates further into negative territory initially weighed on the yen. Since then, however, markets have been more skeptical that the BoJ will actually act this time around. Easing rhetoric from Japan has been ongoing for quite some time as the yen has continuously strengthened, much to the consternation of Japanese officials. There has also been speculation that the BoJ may have already begun to exhaust its stimulus options.

Therefore, barring any very possible surprises, the higher likelihood is that both the Fed and BoJ will leave interest rates and monetary policy unchanged next week. If this is indeed the actual outcome, there should be some further residual pressure on the dollar and further strengthening of the Japanese yen, which could potentially lead to an extension of the downtrend for USD/JPY.

As noted, USD/JPY is currently at a critical technical juncture as of Wednesday, having just bumped up against and retreated from the key 103.00 resistance area. This level is also at a clear downtrend resistance line extending back from May’s 111.00-area highs. If the currency pair continues to respect this resistance and falls further, especially on unchanged central bank stances next week, the key downside target continues to reside at the major 100.00 psychological support level. Any further fall below 100.00 could go on to extend the well-entrenched downtrend for USD/JPY, with the next major downside target at the 97.00 level.