The USD/JPY exchange rate and the Nikkei 225 index moved sideways ahead of the upcoming Donald Trump inauguration and the Bank of Japan (BoJ) interest rate decision. The blue-chip Nikkei index was trading at ¥39,000, where it has been stuck at in the past few months.
At the same time, the USD/JPY pair was trading at 155.95, down from this month’s high of ¥158.90. So, what is next for the Japanese yen and Nikkei 225 index ahead of the BoJ interest rate decision?
BoJ interest rate decision
The biggest monetary policy decision this week will be the first BoJ interest rate decision of the year.
Economists expect the bank to deliver this cycle’s third interest rate hike. Last year, it initially raised interest rates by 0.10%, exiting negative rates. It then hiked by 0.25%, leading to major volatility in the financial market as investors unwound the long-standing Japanese yen carry trade.
This carry trade included borrowing heavily the low-yielding yen and investing in higher-yielding assets like the US dollar.
Analysts expect the BoJ to hike interest rates by 0.25% in the upcoming meeting, bringing the official cash rate to 0.50%. These hikes come as Japan experiences high inflation.
Economists expect that Friday’s inflation data will show that the core Consumer Price Index (CPI) rose from 2.7% in November to 3.0% in December. The headline inflation report will move from 2.9% to 3.2%. As such, the rate hike will be a way of the BoJ to prevent inflation from rising too much.
The BoJ hike comes as other global central banks are slashing interest rates. The Federal Reserve has slashed rates by 1% in the past few months and hinted that the trend will continue this year. The Bank of England and the ECB are also in their rate-cutting cycles.
USD/JPY forecast
The daily chart shows that the USD/JPY exchange rate bottomed at 140 in September up to 158.90 this month. It then dropped sharply to a low of 154.90 last week as investors anticipate the upcoming BoJ rate hike.
The pair has moved below the key support at 156.78, its highest swing on November 15. It has remained above the 50-day Exponential Moving Average (EMA) and the ascending trendline that connects the lowest swing since September.
Therefore, the pair will likely remained under pressure ahead of the upcoming BoJ decision. If this happens, the next level to watch will be the 50% retracement level at 154.9. A move above the resistance point at 156.8 will point to more gains.
Nikkei 225 index analysis
Nikkei index chart | Source: TradingView
The Nikkei 225 index has remained on edge in the past few months. It was trading at ¥39,000, where it has been in the past few months. The index has remained below the key resistance at ¥40,292, where it failed to move above in October last year.
It is above the ascending trendline that connects the lowest swings since September 27. It has formed an ascending triangle pattern, a popular continuation sign in the market.
The Nikkei 225 index has moved slightly below the 50-day moving average. Therefore, it will likely continue rising as bulls target the key resistance at ¥40,292. A move below the ascending trendline will point to more downside, potentially to the next point at ¥37,376, its lowest point on September 27.
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