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In our FX review this week, we discuss the implications of the latest Fed meeting, and also talk about why we are bullish on the Japanese Yen (JPY).

Did the Fed really deliver?

On Wednesday, the US Fed decided to raise interest rates by 0.75%. We provided a handy preview to the meeting, in which we assigned a 75% probability of this happening. We saw some potential of a larger hike, but in the end the committee followed market consensus.

Even with this bump (taking the base rate to 2.5%) we saw the USD sell off. The main reason for this was the rhetoric from Chairman Powell that this could be the neutral rate. This neutral policy rate is the reference to where the Fed see the long-term equilibrium interest rate being.

This was a surprise to some, who are expecting several further interest rate hikes in coming months. You can see the current implied interest rate changes for coming meetings on our Data section.

Ultimately, we don’t think this derails USD strength anytime soon. Even without material further interest rate hikes, it still is likely to stay strong in a backdrop of high inflation, concerns around growth slowdown and the continuing war in Ukraine.

Yen back!

After being one of the worst performing currencies so far this year, USDJPY posted a bearish outside week, closing just above 133. We think this could trigger a larger move lower, not just in USDJPY but also in EURJPY.

JPY yields have been artificially kept low by the central bank, while most other developed nations have seen yields move higher. However, we’re now in a position when yields are starting to move lower, highlighted by the movements after the US Fed meeting on Wednesday. Investors are starting to revise lower expectations of further hikes.

Therefore, this should reduce the differential between other G10 yields and Japan. As such, JPY should strengthen against these currencies, as the gap shrinks.

We went short EURJPY last week, and booked good profits on Friday. We’re keen to enter more shorts in the coming week.

Watch out for the Bank of England

Up next week our focus is on the BoE, who meet on Thursday. We think it’s going to be a similar story to the Fed, in that the central bank will raise rates, but will caveat further hikes as uncertain given the gloomy UK outlook.

We think in the near term this will be GBP negative, so are likely going to be looking to short any rallies early in the week to position for this event risk.

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