16.12.202209:14 Forex Analysis & Reviews: USD/JPY to face sharp volatility

The yen dropped significantly following the Fed meeting. The regulator voiced its strong commitment to a hawkish stance. Yesterday, the dollar/yen showed a steep decline. However, it may drift lower as the BoJ meeting will be held soon.

The Fed raised the key rate by 50 basis points. Jerome Powell's speech at the press conference stirred market volatility.

Despite clear signs of economic slowdown, Powell said the central bank would continue raising rates. He also hinted that the regulator could hike rates to higher levels than expected.

The fed funds rate currently stands in the 4.25%-4.50% range. According to the Fed's 'dot plots', interest rates could reach 5.1% in 2023, up from the 4.6% predicted by the central bank in September.

Many market participants took Powell's statements with a pinch of salt due to a risk of a looming recession.

Investors believe that by mid-2023, the key rate will hit 4.9% before falling to 4.4% by the end of the year.

Nevertheless, the current stance remains hawkish. Speculators are pricing in at least 2 more rate hikes by 25 basis points next year.

Further tightening is excellent news for the US dollar. On Friday night, the US dollar index jumped by 0.85%, touching its September high.

Such a sharp increase in the greenback also facilitated the growth of the USD/JPY pair. On Thursday, the dollar/yen appreciated by 1.7% and tested a 2.5-week high of 138.18.

Despite the recent rally, JPY remains the worst-performing currency in the basket. Since the start of the year, the yen has lost almost 15% versus the US dollar amid the winding rate gap between the Fed and the BoJ.

Many analysts believe that in the near future the Japanese currency may retreat to its former lows due to the BoJ's dovish rhetoric.

The Bank of Japan will hold its last monetary policy meeting this year on December 19-20. According to analysts, the regulator will not change its monetary policy parameters.

So, it will keep its key rate near the zero level. This is a bearish factor for the yen, especially given the Fed's aggressive stance.

If the Japanese regulator once again confirms its commitment to an ultra-loose stance next week, there could be another surge in volatility in the USD/JPY pair.

The pair is likely to grow drastically to the psychologically important level of 140.

Alternatively, the pair may sink to a November low of 133 if the BoJ hints at possible changes in monetary policy.

A recent poll by the daily Mainichi paper showed 55% of respondents said the BOJ should review current monetary easing.

Historically, such revision always occurs before significant changes in monetary policy. This is why traders are now looking for any hint of a possible revision.

Markey plays are widely discussing the odds of the gradual ending of ultra-loose monetary policy as BoJ Governor Haruhiko Kuroda's term ends in April. The majority of analysts believe that the era of monetary easing will come to an end after he bows out.

Izuru Kato, an analyst at Totan Research, assumes that there is no certainty about a change in stance. However, if people become more discontent with rising inflation, the Bank of Japan will be forced to revise its soft stance.

If the BoJ provides hints about even the smallest changes in monetary policy, Japanese government bonds will see a sell-off. It will boost demand for the yen.

However, these are just long-term prospects. Currently, the yen is weak due to the widening rate gap between the Fed and the BoJ. It will hardly resume steady growth in the near future.