What’s next for USD/JPY after this week’s sharp correction lower?

It has been an important week for central bank policy updates with the Fed, BOE, and BOJ all holding meetings.

The dollar has lo-lost upward momentum since the Fed's policy update.

Why do you think we have seen such a turnaround?

Yeah, it's a good question.

Like, initially, I think the market was n-more nervous than normal that the Fed could have hiked rates this week, but obviously that didn't, didn't happen.

So I think there was some initial relief there that the Fed left rates on hold, and that, that definitely initially weakened the dollar.

Uh, on top of that as well, I think there was an expectation going into the meeting that even if the Fed kept rates on hold, that we would see hawkish comments from Kevin Warsh in the press conference.

And I think the comments on the whole were definitely kind of less hawkish than we and many people had, had feared, even though we did see three regional Fed presidents dissenting and vote in favor of a, a rate hike this week.

I think overall though, if you look at his comments, there is still a lack of, of guidance really over future policy.

So in many ways, we're, we're still very much kind of in, in the dark over how the Fed is, is likely to respond with their, their policy, uh, approach go-going forward.

But we would kind of highlight though that the kind of one thing that we did see kind of emphasized on a number of occasions is that Kevin Warsh was highlighting that the recent move higher in market rates, both in nominal and real yields, was contributing to a tightening in financial conditions.

And, and that tightening of financial conditions was helping to do some of the Fed's work.

So that's kind of implying that, that the need for higher rates from the Fed was being kind of offset by, by the move higher in, in market rates that's, that's already, already happened.

So that does appear to be kind of creating a bit more leeway for the Fed to keep rates on hold in, in the near term, and like you say, gives them more time to assess how inflation risks evolve over the summer.

Obviously, we will have a number of key economic data releases over the coming months, and then obviously the Fed will be watching, like everyone else, the, the latest developments in the Middle East before deciding whether to hike rates in September at the next policy meeting.

But yeah, definitely going into the meeting, the market was almost fully pricing in a hike for September, but the market's obviously less, less convinced now that, that they'll definitely hike rates in, in September.

And the market, I think, has generally seen this kind of, I guess, the lack of strong, strong, strong signal for, for the Fed to, to hike at one of the upcoming meetings has been viewed as, as, as, as definitely less, less hawkish.

And some market participants are, are more fearful now that the Fed could, could fall behind the curve in terms of tightening policy to address those upside inflation risks.

So we have seen the long end of the US curve has, has, has moved higher to, to better reflect those in-inflation risks of the Fed being kind of inactive and, and not tightening policy, uh, enough.

So that, that has resulted in, in the US yield curve steepening quite, quite sharply in recent days.

And, and normally when we look at how the dollar performs, we do tend to see that it does weaken when we see a steepening of, of the US yield curve.

So I think those developments definitely playing into a, a weaker dollar since, since the Fed meeting.

And we think as well going forward in the next couple of, couple of months, there probably is this now like a higher hurdle for the dollar to strengthen further over the summer.

I think the US rate market will be more cautious over pricing in, uh, additional Fed rate hikes go-going forward.

Thanks, Lee.