Stocks dive ahead of expected Fed interest rate hike

The USD/JPY currency pair remained relatively stable around 155.25 during the early Asian trading session on Wednesday, as market participants opted to observe the sidelines before the US Federal Reserve's interest rate decision later in the day. Forecasts suggest the Fed might raise interest rates for the first time in three years, aiming to curb stubbornly high inflation.

The Bank of Japan (BoJ) is expected to boost its benchmark policy rate by 0.25% to 1.25% at its upcoming September meeting, marking the highest borrowing costs for Japan since April 1995. Forex traders are watching for hints from Fed Chair Kevin Warsh's post-decision press conference about the trajectory of US interest rates. Meanwhile, the BoJ is anticipated to raise rates to a level market participants expect, although concerns linger over the pace of future hikes.

Mizuho Securities' Masafumi Yamamoto expresses caution that the BoJ's move may not surprise the market, while Scotiabank strategists emphasize the emphasis on the central bank's communication and outlook for future policy shifts. Technical analysis indicates that USD/JPY is under pressure on the downside, trading below the Bollinger middle band and the 100-day simple moving average (SMA), suggesting a bearish trend despite a recent rebound from the lower band.

The RSI is around 40, indicating weak momentum, which could prompt selling pressure if prices recover near the upper band. The Japanese Yen, being a widely traded currency, is influenced primarily by the Bank of Japan's policies, the yield differential between Japanese and US government bonds, and overall market sentiment. The BoJ's mandate of currency control means its actions hold significant sway over the Yen's value.

In recent years, the gradual withdrawal of the Bank of Japan's ultra-loose monetary policy and interest rate cuts by other major central banks have narrowed the yield gap between the US and Japan, subsequently dampening the downward pressure on the Yen.