Market Data 
- The JPY rebounds after touching a three-week trough against the USD earlier this Tuesday.
- Hawkish BoJ expectations underpin the JPY and cap USD/JPY amid subdued USD demand.
- Receding safe-haven demand might keep a lid on any further gains for the safe-haven JPY.
The Japanese Yen (JPY) sticks to positive bias through the early European session in the wake of hawkish Bank of Japan (BoJ) minutes, which showed that policymakers discussed under what conditions the central bank should raise interest rates further. This, along with subdued US Dollar (USD) price action, drags the USD/JPY pair away from a nearly three-week high, around the 151.00 neighborhood touched this Tuesday.
However, the upbeat market mood – bolstered by hopes for less disruptive US trade tariffs, the Russia-Ukraine peace deal, and China’s stimulus measures – is seen acting as a headwind for the safe-haven JPY. Meanwhile, the Federal Reserve’s (Fed) forecast of two 25 basis points interest rate cuts in 2025 marks a big divergence in comparison to hawkish BoJ expectations and supports prospects for a further JPY appreciation.
Japanese Yen seems poised to climb further as hawkish BoJ minutes reaffirm rate hike bets
- Reports on Sunday indicated that US President Donald Trump is planning a narrower, more targeted agenda for reciprocal tariffs set to take effect on April 2, fueling hopes for less disruptive tariffs and underpinning the risk sentiment.
- Talks between the US and Russian delegations concluded on Monday, and the discussion was centered around trying to reach a Black Sea maritime ceasefire deal. According to Russian state media, RIA, a joint statement is expected on Tuesday.
- Financial Times reports that China is considering including services in a multibillion-dollar subsidy program to stimulate consumption, further boosting investors’ confidence and driving flows away from the safe-haven Japanese Yen.
- The US Dollar climbed to a nearly three-week high on Monday in reaction to the better-than-expected release of the US Composite PMI – which rose to 53.5 in March from 51.6 in the previous month –and further lends support to the USD/JPY pair.
- Minutes of the Bank of Japan (BoJ) last policy meeting held in January showed most members agreed the likelihood of hitting the 2% inflation target had been rising. Moreover, policymakers discussed the pace of raising interest rates further.
- Meanwhile, BoJ Governor Kazuo Ueda said in the parliament on Monday that our policy purpose is to achieve stable prices and that the central bank will adjust the degree of monetary easing if the 2% inflation target is likely to be achieved.
- This comes on top of the growing acceptance that stronger wage growth could contribute to mounting domestic price pressures and keep the door open for more interest rate hikes by the BoJ, which should help limit further losses for the JPY.
- In contrast, the Federal Reserve signaled last week that it is likely to deliver two 25 basis points rate cuts by the end of 2025. Traders, however, are pricing in the possibility of three quarter-point rate cuts at June, July, and October meetings.
- Atlanta Fed President Raphael Bostic said on Monday that he anticipates slower progress on inflation in coming months and sees the central bank cutting benchmark interest rate only a quarter of a percentage point by the end of this year.
- Tuesday’s US economic docket features the release of the Conference Board’s Consumer Confidence Index, New Home Sales, and the Richmond Manufacturing Index. This, along with Fed speak, could influence the USD price dynamics.
- The focus, however, will remain glued to the Fed’s preferred inflation gauge – the US Personal Consumption Expenditure (PCE) Price Index on Friday – due on Friday, which will drive market expectations about the future rate-cut path.
USD/JPY bears need to wait for a convincing break below the 150.00 mark to regain control
From a technical perspective, the overnight breakout above the 150.00 psychological mark and a subsequent move beyond last week’s swing high, around the 150.15 region, was seen as a key trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and support prospects for a further appreciating move for the USD/JPY pair. Hence, some follow-through strength beyond the 151.00 round figure, towards testing the monthly swing high around the 151.30 area, looks like a distinct possibility.
On the flip side, any corrective pullback might now attract fresh buyers near the 150.15 region, which should help limit the downside near the 150.00 mark. A convincing break below the latter, however, could drag the USD/JPY pair to the 149.30-149.25 intermediate support en route to the 149.00 round figure and the 148.70-148.65 horizontal zone. Failure to defend the said support levels will suggest that the recent recovery from a multi-month low has run out of steam and shift the near-term bias back in favor of bearish traders.
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.
