- The Japanese Yen continues losing ground amid the divergent BoJ-Fed policy expectations.
- The recent intervention warnings by Japanese authorities do little to provide any respite.
- Traders now look to the US Q1 GDP report for some impetus ahead of the BoJ on Friday.
The Japanese Yen (JPY) extends its recent well-established downtrend and weakens further below the 155.50 level against its American counterpart, or the lowest level since June 1990 during the Asian session on Thursday. Expectations that the rate differential between Japan and the United States (US) will remain wide for some time turn out to be a key factor that continues to undermine the JPY. The downfall, meanwhile, raises the risk of an intervention by Japanese authorities. This, however, does little to ease the bearish pressure surrounding the JPY bulls ahead of the Bank of Japan (BoJ) policy decision on Friday.
The Japanese central bank is widely expected to leave policy settings and bond purchase amounts unchanged after raising interest rates in March for the first time since 2007. In contrast, investors seem convinced that the Federal Reserve (Fed) will not begin its rate-cutting cycle before September amid sticky inflation. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside. The US Dollar (USD) bulls, however, seem reluctant and prefer to wait for more cues about the Fed’s rate-cut path before placing fresh bets, which, in turn, could act as a headwind for the currency pair.
Hence, the release of the Advance US Q1 GDP report later today and the Personal Consumption Expenditures (PCE) Price Index will play a key role in influencing the USD price dynamics. This, in turn, will help in determining the next leg of a directional move for the USD/JPY pair.
Daily Digest Market Movers: Japanese Yen selling bias remains unabated amid BoJ’s uncertain rate outlook
- Expectations that the difference in interest rates between the US and Japan will stay wide drag the Japanese Yen to a fresh multi-decade low on Thursday, fueling speculation about possible intervention by Japanese authorities.
- Japanese officials have repeatedly warned that they will take necessary action to address excessive moves in the yen if needed and have emphasized a focus on the pace of the currency’s depreciation rather than a precise price level.
- Moreover, Bank of Japan Governor Kazuo Ueda has said the central bank may hike rates again if the fall in the domestic currency significantly pushes up inflation, which might hold back the JPY bears from placing fresh bets.
- Japan’s Liberal Democratic Party (LDP) executive, Takao Ochi, said on Wednesday that the JPY’s fall towards the 160 against its American counterpart may be deemed excessive and could prompt policymakers to consider some action.
- Japan’s Finance Minister Shunichi Suzuki refrained from commenting on specific FX levels, while Chief Cabinet Secretary Yoshimasa Hayashi reiterated that it is important for currencies to move in a stable manner reflecting fundamentals.
- Investors keenly await the outcome of the highly-anticipated two-day BoJ policy meeting on Friday for cues on when the central bank will raise interest rates again, which, in turn, will determine the near-term trajectory for the JPY.
- The US Census Bureau reported on Wednesday that Durable Goods Orders increased by 2.6% in March as compared to the previous month’s downwardly revised 0.7% rise, while new orders excluding transportation rose 0.2%
- This comes on the back of strong US consumer inflation figures and reaffirmed expectations that the Federal Reserve will not begin its rate-cutting cycle before September, which acts as a tailwind for the US Dollar and the USD/JPY pair.
- Traders now look forward to the release of the Advance US GDP report, which is expected to show that growth in the world’s largest economy slowed to a 2.5% annualized pace during the first quarter of 2024 from the 3.4% previous.
- Apart from this, the US Personal Consumption Expenditures (PCE) Price Index on Friday will be looked upon for cues about the Fed’s rate-cut path and determining the next leg of a directional move for the buck and the currency pair.
Technical Analysis: USD/JPY bulls retain control, overbought RSI warrants caution before positioning for further gains
From a technical perspective, the overnight breakout through a short-term trading range and a subsequent strength beyond the 155.00 mark could be seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart remains in the overbought territory, warranting some caution amid intervention fears and ahead of the BoJ event risk. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for the next leg of a positive move. Nevertheless, the USD/JPY pair seems poised to prolong its recent well-established uptrend from the March swing low and aim to conquer the 156.00 round figure.
On the flip side, any meaningful corrective slide is likely to attract fresh buyers and remain limited near the 154.90-154.85 region. This is followed by the 154.55-154.45 support zone, which, if broken, might prompt some technical selling and drag the USD/JPY pair to the 154.00 round-figure mark. The downward trajectory could extend further towards last Friday’s low, around the 153.60-153.55 area.
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.
