Market Data 
- The Japanese Yen remains on the defensive amid the BoJ’s uncertain policy outlook.
- A positive risk tone also undermines the JPY, though intervention fears limit losses.
- Reduced Fed rate cut bets act as a tailwind for the USD and lend support to USD/JPY.
- Traders now seem reluctant ahead of this week’s key central bank event and data risks.
The Japanese Yen (JPY) remains depressed against its American counterpart and languishes near a multi-decade low during the Asian session on Monday. The Bank of Japan’s (BoJ) cautious approach towards further policy tightening, along with expectations that the Federal Reserve (Fed) will delay cutting interest rates, suggests that the US-Japan rate differential will stay wide. This, along with hopes that the Iran-Israel conflict will not escalate further, turns out to be a key factor that is seen undermining the safe-haven JPY.
That said, the BoJ Governor Kazuo Ueda’s hawkish rhetoric last week and fresh warnings by Japanese Finance Minister Shunichi Suzuki against excessive currency market moves help limit deeper JPY losses. Traders also seem reluctant and prefer to wait on the sidelines ahead of the crucial BoJ policy decision on Friday. Apart from this, important US macro releases – the Advance Q1 GDP on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday – will determine the near-term trajectory for the USD/JPY pair.
Daily Digest Market Movers: Japanese Yen struggles to lure buyers amid BoJ policy uncertainty, positive risk tone
- Data released on Friday showed that Japan’s consumer inflation eased more than expected in March, raising uncertainty about whether the Bank of Japan will raise rates again and weighing on the Japanese Yen.
- Iran signaled that it has no plans to retaliate against the Israeli limited-scale missiles strike on Friday, which helps improve investors’ appetite for riskier assets and further dents the JPY’s relative safe-haven status.
- BoJ Governor Kazuo Ueda said on Friday that the central bank might consider raising interest rates again if significant declines in the Yen substantially boost inflation, lending support to the domestic currency.
- Japan’s Finance Minister Shunichi Suzuki issued fresh warnings to speculators about pushing down the JPY too much and reiterated that he would take appropriate action against excessive currency market moves.
- According to Fed funds futures, the Federal Reserve is now anticipated to cut interest rates by roughly 40 basis points (bps), or less than two cuts this year starting September in the wake of sticky US inflation.
- This suggests that the large rate differential between the US and Japan will stay, which should act as a headwind for the JPY and lend support to the USD/JPY pair ahead of the crucial BoJ monetary policy decision.
- Markets predict no policy change following last month’s historic decision to end the negative rate policy and Yield Curve Control (YCC) program, suggesting that the focus will remain on the quarterly outlook report.
- From the US, the Advance Q1 GDP print and the Personal Consumption Expenditures (PCE) Price Index are due for release on Thursday and Friday, respectively, which should influence the US Dollar price dynamics.
Technical Analysis: USD/JPY bulls might wait for a move beyond the 155.00 mark before placing fresh bets
From a technical perspective, the range-bound price action witnessed over the past week or so might still be categorized as a bullish consolidation phase against the backdrop of the recent rally from the March low. That said, oscillators on the daily chart are flashing overbought conditions and capping the upside for the USD/JPY pair. Nevertheless, the setup suggests that the path of least resistance for spot prices is to the upside, and any meaningful corrective pullback might still be seen as a buying opportunity near the 154.30 area. This should help limit the downside near the 154.00 mark, which, if broken, might expose Friday’s swing low, around the 153.60-153.55 region. Some follow-through selling has the potential to drag the pair further towards the 153.30-153.25 intermediate support en route to the 153.00 round figure.
On the flip side, the multi-decade high, around the 154.75-154.80 region touched last week, could act as an immediate hurdle ahead of the 155.00 psychological mark. A sustained strength beyond the latter will confirm a fresh breakout through the short-term trading range and set the stage for an extension of a well-established appreciating trend.
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.
