The yen weakened against the US dollar after the Federal Reserve kept rates unchanged while projecting a further tightening bias, with most officials still pencilling in one hike later this year. USD/JPY was last at 160.66, after rebounding from an intraday low of 160.11. The Fed reiterated its focus on returning inflation to its 2% goal and removed forward guidance from its statement, while describing growth as strong and the labour market as stable, with the unemployment rate nearly unchanged. It also said inflation remains elevated, partly due to supply shocks including energy.
In the Summary of Economic Projections, the median forecast for the Fed funds rate was revised up to 3.8% from 3.4% in March, while US GDP growth is seen at 2.2% by end-2026. Core PCE inflation is projected at 3.3%, which is 1.3 percentage points above the 2% target. USD/JPY rose 0.14%, supported by higher US Treasury yields, though gains were tempered by concerns over possible Bank of Japan FX intervention. Technical levels cited include resistance at 161.00, then 161.50 and 162.00, with support at 159.73 and the 50-day SMA at 159.04.
Interest Rate Differentials and USD/JPY Strategy
With the Federal Reserve signaling a higher-for-longer interest rate path, we believe the fundamental case for a stronger U.S. dollar against the yen is clear. The interest rate differential is the dominant factor, and with the Fed Funds Rate now projected to hit 3.8%, that gap is set to remain wide. Our primary strategy in the coming weeks will be to position for further USD/JPY strength.
We see value in buying call options with strike prices above 161.00, as the path of least resistance is upward. However, the risk of intervention from the Bank of Japan is now acute, as Japanese authorities have previously stepped in to defend the yen around the 160 level in 2024. Therefore, using bull call spreads could be a prudent way to define risk and cap potential losses from a sudden reversal.
Inflation Outlook, Volatility, and Trade Management
The Fed’s own forecast of 3.3% Core PCE inflation justifies their hawkish stance and supports our view. Recent data shows that bringing inflation down from the 3% level has proven difficult globally, and with U.S. unemployment holding steady below 4%, the Fed has the green light to prioritize price stability. This economic backdrop makes a sustained rally in the yen unlikely without direct market intervention.
The removal of forward guidance by the new Fed Chair adds a layer of uncertainty, which will likely keep volatility priced into options elevated. This environment can be favorable for strategies like straddles around key U.S. inflation or jobs data announcements in the next month. We should be prepared for sharp, data-driven moves rather than a slow, steady trend.
The positive carry from holding long USD/JPY positions provides a significant tailwind and a strong incentive to remain in the trade. Even if the Bank of Japan intervenes, the underlying interest rate dynamics will likely attract buyers on any significant dips. This should put a floor under the currency pair, making support levels near 159.73 attractive entry points for new long positions.
