Fed says higher-for-longer (again) and markets shrug - Japan intervenes (again) and markets shrug

There were two big news stories in the Forex market yesterday, but neither altered the long-term fundamental outlook.

First off, the Federal Reserve, as expected, kept interest rates on hold. But the post-decision news conference was grim listening for anyone (everyone except for Donald Trump?) hoping for a reduction in rates any time before November.

“It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2 per cent inflation,” Fed chair Jay Powell said after the announcement. “I don’t know how long it will take.” At least he all but ruled out the chance of a surprise rise in rates, a nightmarish scenario some market watchers had been worrying about recently, saying, “I think it’s unlikely that the next policy rate move will be a hike.”

The markets generally ignored the Fed decision and the ensuing press conference, with the EUR/USD actually gaining ground in late trading yesterday, pushing above 1.0700 before falling back again this morning. Expectations of higher-for-longer rates are well-entrenched now, and it will take a lot more than ´more of the same’ talk from Jay Powell to move the needle in any significant way.

In the long and medium term, we can still expect the EUR/USD to struggle. Recent inflation data from the eurozone showed that core inflation is still falling, increasing the likelihood of a June rate cut.

Bank of Japan intervenes again (probably)

Overnight, and on the other side of the world, the mobile dumpster fire that is the USD/JPY created headline news (again) following another probable Bank of Japan intervention.

The JPY has been a happy hunting ground for short-sellers in 2024, with the USD/JPY gaining over 12% since the beginning of the year. With Japan reliant on imports for over 90% of its goods and services, the expectation is that the Ministry of Finance finally said enough is enough and asked the BoJ to intervene.  

The first probable intervention occurred on Monday, 29^th April. Market analysts believe the BoJ spent about 35 billion USD propping up the JPY, with the USD/JPY falling about 2.5% in a matter of hours, from 159.4 to 155.5, before stabilising around the 156 level. The USD/JPY crept back up again throughout Tuesday and Wednesday’s trading. Obviously dissatisfied with the outcome, it looks like the BoJ intervened again on the night of the 1^{st of} May, with the USD/JPY suddenly falling another 2% within an hour.

Although the effect of the suspected interventions has been eye-catching, the fundamentals behind yen weakness — the wide differential between low Japanese interest rates and higher US rates — remain firmly in place. 

But it does seem like the BoJ has drawn a line in the sand, so JPY bears are cautious and for good reason. The BoJ is sitting on a war chest of 1.3 trillion USD in forex reserves and could easily continue intervening in the currency markets.