USD/JPY: Fed Decision to Set the Tone for the Pair as Carry Trade Risks Grow
Michael Kramer | Mar 19, 2025 12:52AM ET
Stocks gave back all of Monday's gains and a bit more, with the S&P 500 finishing yesterday lower just over 1%.
Of course, today at 2 PM ET, we get the FOMC meeting decision, the Summary of Economic Projections, and then the Powell presser. That leaves the USD/JPY in the crosshairs, and really, the path for the USD/JPY couldn’t be more two-way. You can flip a coin at this point to call the direction.
However, when looking at the spread between the US 10-year and the 10-year JGB, the bias appears to suggest that the spread continues to narrow; it certainly looks like some kind of bear pennant has formed in the chart.
If the spread narrows further, it would suggest that the USD/JPY falls, meaning that the Yen strengthens since the two track each other almost perfectly.
The BoJ has had plenty of opportunities to counter the rising Japan 10-Year JGB yield recently, but it has opted not to counter the higher yields.
So we go back to the USD/JPY, and if material strengthening occurs, then I think it will mean that the carry trade continues to unwind.
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Of course, we won’t know the actual outcomes until Wednesday evening, after the Fed’s meeting, because we must wait and see what Powell & Co. has to say. So, being patient may be the best bet until outcomes become clear.
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