USD/JPY Volatility Spikes Amid FX Intervention Risks and Hawkish Rate Hikes

The Federal Reserve and Bank of Japan (BoJ) have both raised interest rates in recent weeks, sparking a mixed reaction in currency markets. The Fed's decision to raise rates for the first time in nearly three years was seen as a hawkish move, while the BoJ's rate hike was more nuanced, with some policymakers expressing caution.

The Fed's rate increase is aimed at supporting a 'timelier' return of inflation to the 2% target. Chair Warsh emphasized that this decision removes a 'dose of accommodation', but he reiterated his pledge to restore price stability. The updated dot plot shows broad support for one more hike within the year, with markets pricing in such an outcome.

The BoJ's rate hike was its fastest tightening cycle since 1990, with officials pointing to more moves ahead to ensure inflation does not exceed their 2% target. However, two members dissented in favour of a hold in a 7-2 vote split, and Governor Ueda maintained a cautious tone during his press conference.

The rate differential between the US dollar and Japanese yen remains sizeable, which could continue to support the carry trade and a further USD/JPY advance. However, the pair faces pushback at the EMA200, and rejection would keep the immediate bias to the downside.