USD double-takes, rallies on hawkish FOMC. Dovish BoJ tanks JPY.

USD double-take post FOMC, JPY tanks on very dovish BoJ.
The FOMC statement was as expected as the Fed chopped the policy rate 0.25% and announced that its balance sheet reduction (QT or quantitative tightening) would end on December 1. There was a mild surprise on one voter dissenting in favour of no cut. But the big surprise came in the Fed Chair Powell press conference, as he took trouble to underline that another 25-bp cut in December is no foregone conclusion as the Fed is not comfortable enough with forecasts for inflation or the economy slowing to commit to anything now, with the lack of data an additional frustration making things murky. US treasury yields jolted higher and the US dollar saw a sharp rally that was oddly partially unwound overnight before USD strength came back in today in the European session – and accelerating in hour before publishing this.

The Bank of Japan was an incredibly dovish affair, chiefly during the Governor Ueda press conference as Ueda claimed that the Bank was not risking falling behind the curve and that he would still like to see some more wage data during the new tariff regime to understand the inflation risks. That suggests the willingness to wait for the late winter/spring wage negotiation rounds before making any policy move. The combination of a hawkish Fed boosting US treasury yields and this dovish BoJ outcome was the most negative possible scenario for the JPY, which has tumbled to new lows versus the USD, the EUR and elsewhere.

Regarding that JPY strength idea…clearly too early!
In my previous update, I floated the idea that the JPY could eventually strengthen on investment flows returning to Japan as a major contributing factor in addition to the slow BoJ policy normalization relative to further Fed rate reductions. I also noted that there was little to no support or traction for this idea on the JPY charts just yet. With the very dovish BoJ here and the hawkish Fed surprise driving a surge in US treasury yields, JPY bulls will need to sit on their hands for at least a while longer until something more compelling develops as we have just seen another bullish break higher in USDJPY above 153.25 until proven otherwise (more below), a move that could challenge the 160 level eventually if Japan doesn’t want to put up a fight against JPY weakness and US treasury yields continue to pull higher.

Chart: USDJPY
USDJPY punched through local resistance and is trading at multi-month highs. The move basically opens up the rest of the empty space above if we continue right through the descending trendline near the current price. The next levels higher are the two resistance levels of the prior major tops at 158.87 and then the remarkable 161.95. Only a sudden flipping of the table here and huge sell-off based on some new event emerging out of left field could alter the technical picture.