- The US dollar has initially tried to rally a bit during the trading session on Friday, but has given back gains as the inflation numbers were a bit of a mixed bag and therefore, we start to focus on the Bank of Japan again.
- After all, people are assuming that the Bank of Japan will find a reason to tighten monetary policy this year.
- And while that's probably true, the reality is that the interest rate differential is going to be huge for quite some time.
With that being the case, I think you've got a situation where traders will start to look at this through the possibility of trying to see if this area that we are in right now actually holds. If it does not, then the US dollar is probably plunging back down to the 142 yen level. This nonsense coming out of the Federal Reserve and the Bank of Japan has made trading very difficult. And then of course, people are worried about the tariff wars. So, I think volatility is going to get worse, not better. Japan increasing its interest rate to 0.75% isn't much of a big deal, but traders right now are worried about the rate of change.
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Federal Reserve
The question then becomes will the Federal Reserve start cutting later this year? Maybe they do, maybe they don't, and if they don't, then eventually the Japanese yen will have to give up some of these gains. Right now though, it's obvious that the US dollar is basically flat on its back when it comes to the yen, so while I don't like buying this USD/JPY pair, I certainly wouldn't sell it quite yet either below the 148 yen level, then I think we start to see a pretty significant acceleration to the downside. At this juncture, I think a lot of questions are still out there, and I do think this is one of the more difficult pairs to trade at the moment, as the fundamentals suggest more interest rates in Japan and inflation, but the inflation in the United States is very unlikely to go anywhere.
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