USD/JPY surged to a fresh two-year high after the Federal Reserve delivered a significantly more hawkish message than markets had anticipated, reviving expectations that US interest rates could rise again before year-end. While the Fed left the federal funds rate unchanged at 3.50%-3.75% as widely expected, the updated projections painted a much more inflation-focused picture. The median federal funds rate projection now stands at 3.8% at the end of 2026, implying one additional rate hike from current levels.
The biggest surprise came from the new dot plot. Nine policymakers now expect at least one rate increase this year, compared with eight who see rates remaining unchanged and only one who anticipates a cut. That distribution marks a notable shift from the market narrative that had largely centered on how long rates would remain elevated rather than whether they might move higher. Supporting the hawkish message, the Fed also raised its inflation forecasts, signaling growing concern that recent price pressures may prove more persistent than previously expected.
Fed Chair Kevin Warsh reinforced that interpretation in his first post-meeting press conference. He adopted an uncompromising tone on inflation, declaring that “persistently high prices are a burden for the American people” and emphasizing that the Committee was “unambiguous and unanimous” in its commitment to restoring price stability. Importantly, Warsh declined to rule out a rate hike as soon as the July meeting. However, he simultaneously announced the end of traditional forward guidance, arguing that the current economic environment makes such signaling less useful. The result was a Fed that sounded hawkish without committing to a specific policy path.
Markets nevertheless interpreted the message as opening the door to further tightening. Fed funds futures now imply around a 30% probability of a July hike, rising to 62% for September, 72% for October and 85% by year-end. In effect, investors are treating September, when policymakers will release a new set of economic projections, as the most likely window for another move should inflation remain elevated.
The reaction in Japan has been relatively restrained. Chief Cabinet Secretary Minoru Kihara reiterated that authorities stand ready to respond appropriately to excessive currency movements at any time. Yet verbal intervention may prove less effective when the primary driver is a broad repricing of US interest rates rather than speculative activity alone. The contrast between markets was telling: while Wall Street weakened on higher-rate concerns, the Nikkei climbed above the 71,000 mark as investors welcomed the earnings benefits of a weaker Yen.
Technically, USD/JPY’s rally remains firm. As long as minor support at 160.10 holds, further gains are favored toward the 2024 high at 161.94. Decisive break there would open the way to 100% projection of 152.25 to 160.71 from 155.01 at 163.47. On the downside, a break below 160.10 could trigger a deeper pullback toward 159.54 and below. For now, however, the combination of renewed Fed tightening expectations and gradual BoJ normalization continues to argue for further upside pressure on the pair.
