- The Japanese Yen remains depressed near a multi-decade low amid the BoJ’s dovish outlook.
- Reduced Fed rate cut bets lift the USD to a fresh YTD top and further lend support to USD/JPY.
- Intervention fears and a softer risk tone could help limit deeper losses for the safe-haven JPY.
The Japanese Yen (JPY) continues with its struggle to register any meaningful recovery and languishes near a 34-year low against its American counterpart heading into the European session on Tuesday. The Bank of Japan’s (BoJ) dovish outlook, indicating that it is in no rush in terms of policy normalization, continues to undermine the JPY. Bearish traders, however, remain on alert and refrain from placing fresh bets in the wake of the recent warnings by Japanese authorities, showing readiness to intervene in the market to prop up the domestic currency. Apart from this, a generally weaker tone around the equity markets helps limit the downside for the safe-haven JPY.
The US Dollar (USD), on the other hand, prolongs its recent upward trajectory and climbs to its highest level since November in the wake of expectations that the Federal Reserve (Fed) will delay cutting interest rates. This suggests that the large difference in rates between the US and Japan will stay for some time, which might continue to drive flows away from the JPY and support prospects for a further near-term appreciating move for the USD/JPY pair. Traders now look to the US macro data, which, along with speeches from influential FOMC members, including Fed Chair Jerome Powell, might influence the USD and provide some impetus to the currency pair.
Daily Digest Market Movers: Japanese Yen struggles to lure buyers amid divergent Fed-BoJ policy expectations
- The Japanese Yen continues to be weighed down by the Bank of Japan’s dovish outlook, indicating that it is in no rush in terms of policy normalization, which, along with a bullish US Dollar, keeps the USD/JPY pair pinned near a 34-year peak.
- The incoming US data pointed to a still-resilient economy and sticky inflation, raising doubts over how aggressively the Federal Reserve will be able to cut interest rates this year and pushing the US Treasury bond yields to a five-month high.
- The US Census Bureau reported on Monday that Retail Sales rose 0.7% in March as compared to market expectations of a 0.3%increase and the previous month’s reading was revised higher to show a growth of 0.9% vs. 0.6% reported originally.
- This, to a larger extent, helps offset the disappointing release of the Empire State Manufacturing Index, which improved less than expected to -14.3 in April from -20.9 and indicated continued weakness in the manufacturing business activity.
- The markets are now pricing in less than two interest rate cuts by the end of 2024 as compared to three projected by the Fed, which lifts the US Dollar to its highest level since November and continues to act as a tailwind for the USD/JPY pair.
- Japanese Finance Minister Shunichi Suzuki reiterated on Tuesday that he is closely watching FX moves and will take all possible measures, though refrained from commenting on whether the recent FX moves are too rapid or excessive.
- Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said that it is important for currencies to move in a stable manner, reflecting fundamentals and excessive FX volatility is undesirable, though it does little to provide any respite to the JPY bulls.
- Expectations that the Fed will keep rates higher for longer, along with the risk of a further escalation of conflicts in the Middle East, weigh on investors’ sentiment and lend support to the safe-haven JPY, capping gains for the USD/JPY pair.
- Traders now look to the US macro data – Building Permits, Housing Starts and Industrial Production figures – and speeches by influential FOMC members, including Fed Chair Jerome Powell, for some meaningful impetus later this Tuesday.
Technical Analysis: USD/JPY consolidates amid overbought RSI, seems poised to prolong its appreciating move
From a technical perspective, the recent breakout through a short-term trading range hurdle near the 152.00 round figure and the subsequent move up was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains. Meanwhile, any meaningful corrective slide below the 154.00 mark is likely to attract fresh buyers and remain limited near the 153.40-153.35 region.
This is followed by the overnight swing low or levels just below the 153.00 mark. Some follow-through selling could pave the way for deeper losses and drag the USD/JPY pair further toward the 152.60-152.55 zone en route to the 152.00 resistance-turned-support. On the flip side, momentum beyond the mid-154.00s has the potential to lift spot prices further towards the 155.00 psychological mark.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
