The Dollar/Yen is trading slightly better early Thursday after falling sharply the previous session after the Federal Reserve delivered its 50-basis point rate hike as expected and Federal Reserve Chairman Jerome Powell made comments that dampened expectations for a series of major interest rates hikes between 50- and 75-basis points.

At 04:18 GMT, the USD/JPY is trading 129.216, up 0.116 or +0.09%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $72.49, up $0.53 or +0.73%.

Expectations and Reactions to Fed News

The USD/JPY was inching lower on Wednesday ahead of the outcome of a Federal Reserve meeting, as investors evaluated how much expected U.S. central bank hawkishness was already priced into the greenback.

The Fed was expected to hike rates by 50 basis points, which would be the largest increase in two decades, and announce plans to reduce its $9 trillion balance sheet as it tackles inflation rising at the fastest pace in 40 years.

Additionally, many investors were placing bets that Fed Chair Powell’s post-decision press conference would be the key to any volatility on Wednesday.

Traders were going to be watching Powell for signals on how the U.S. central bank would balance the need to stem rising price pressures against weakening growth if the economy stutters.

Muted Reaction to Rate Hike, Big Reaction to Powell

The USD/JPY barely moved after the Fed raised rates and announced its plans to reduce its balance sheet. That was because everyone knew it was coming. However, what they didn’t know was what Powell was going to say and this is what shook up the market.

Ahead of Powell’s post-meeting press conference, Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a report, “Chair Powell’s post-decision press conference will be key. If he shows any hints of dovishness, markets will take yields and the dollar lower.”

Mr. Thin further added, “That said, we see no reason for Powell to hedge his bets right now and so we expect full speed ahead from the Fed.”

Others must have been thinking the same way, because the 10-year Treasury yields turned lower Wednesday after Fed Chair Powell indicated that the central bank won’t get even more aggressive in raising rates.

Powell also said that 50-basis-point increases are under consideration in the next two meetings. However, he said a 75-basis-point rate hike is not on the table for now.

Short-Term Outlook

When Powell said, “A 75-basis-point increase is not something we’re actively considering.” And, “I would say I think we have a good chance to have a soft or softish landing, or outcome if you will.” He was essentially giving USD/JPY longs a really good excuse to book profits.

Powell wasn’t bearish enough to change the trend to down. He wasn’t bearish at all, in fact. The best way to describe Powell is less-hawkish or more dovish than expectations, depending on how you see it.

Technically, his comments were just enough to turn U.S. Treasury yields lower, which then tightened the interest rate differential between U.S. government bonds and Japanese government bonds, making the U.S. Dollar less-attractive.

So over the short-run, the USD/JPY could retreat. No big deal. Over the long-run, however, the divergence between the hawkish Fed and the dovish Bank of Japan should provide plenty of support from the USD/JPY.

For a look at all of today’s economic events, check out our economic calendar.

This article was originally posted on FX Empire

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