USD/JPY Price Forecast: Retreats from 155.50 with Fed’s policy in focus

The Japanese Yen (JPY) experienced a slight flattening against the US Dollar (USD) in the European trading session on Wednesday, after initially recovering from its early losses. The USD/JPY pair is anticipated to trade with caution as market participants prepare for the Federal Reserve's (Fed) monetary policy decision scheduled at 18:00 GMT.

Traders' focus is more likely to be on the Fed's potential tightening of monetary conditions in the near and medium term rather than the interest rate decision itself. Analysts at BNY predict that an interest rate hike by 25 basis points (bps) to 3.75%-4.00% is highly probable, while still acknowledging that the path to even higher policy rates could be obstructed by potential impediments.

The Bank of Japan (BoJ) is expected to raise interest rates by 25 bps to 1.25% on Friday. In the daily chart, USD/JPY is currently at 155.02, trading below the 20-day Exponential Moving Average (EMA) at 156.41, which may be acting as a barrier against rallies. The Relative Strength Index (RSI) stands at around 39, indicating weak but stabilizing downside momentum rather than outright oversold conditions.

Should the pair break below the 20-day EMA, it may decline further and revisit the monthly low at 152.89. The Federal Reserve, meeting eight times per year, has two key mandates: maintaining inflation at 2% and achieving full employment. It primarily achieves these goals through setting interest rates, influencing the US Dollar's value.

A rate hike typically strengthens the USD, while a rate cut weakens it. If no change is made, market attention shifts to the tone of the Federal Open Market Committee (FOMC) statement and whether it is hawkish or dovish.