The Japanese Yen continues to be undermined by the BoJ’s uncertain outlook about future rate hikes.
Reduced Fed rate cut bets underpin the USD and lift the USD/JPY pair to a fresh multi-decade peak.
Intervention fears and persistent geopolitical tensions do little to limit losses for the safe-haven JPY.
The Japanese Yen (JPY) comes under some renewed selling pressure on the first day of a new week and drops to a fresh multi-decade low against its American counterpart during the Asian session. The Bank of Japan (BoJ) offered few cues on when it will increase interest rates further. In contrast, the Federal Reserve (Fed) is now expected to begin its rate-cutting cycle in September amid still-sticky inflation. This, in turn, suggests that the large difference in rates between the US and Japan will stay for some time, which, in turn, continues to undermine the safe-haven JPY.
Meanwhile, the recent warnings by Japanese authorities that they will intervene in the market to prop up the domestic currency, along with further escalation of conflicts in the Middle East, also do little to provide any respite to the safe-haven JPY. The US Dollar (USD), on the other hand, holds steady near its highest level since early November in the wake of expectations that the Fed may delay cutting interest rates. The hawkish outlook keeps the US Treasury bond yields elevated, which favors the USD bulls and suggests that the path of least resistance for the USD/JPY pair is to the upside.
Daily Digest Market Movers: Japanese Yen remains on the back foot amid the divergent BoJ-Fed policy expectations
The Bank of Japan’s cautious approach, indicating that accommodative financial conditions will be maintained for an extended period, fails to assist the Japanese Yen in registering any meaningful recovery from a multi-decade low.
Japanese government officials continued with their jawboning to defend the domestic currency, which, along with geopolitical developments over the weekend, held back the JPY bears from placing fresh bets and helping limit losses.
Iran launched explosive drones and missiles at Israel in retaliation for a suspected Israeli attack on its consulate in Syria, raising the risk of a broader conflict in the Middle East region and lending support to the safe-haven JPY.
Data released from the US last week did little to ease market concerns about still-sticky inflation and forced investors to push back their expectations for the first interest rate cut by the Federal Reserve to September from June.
Moreover, the current market pricing indicates the possibility of less than two rate cuts in 2024 compared to three projected by the Fed, keeping the US Treasury bond yields elevated and acting as a tailwind for the US Dollar.
The divergent BoJ-Fed policy outlook, meanwhile, suggests that the path of least resistance for the USD/JPY pair remains to the upside and supports prospects for an extension of last week’s breakout momentum.
Traders now look to the US economic docket, featuring Retail Sales figures and the Empire State Manufacturing Index, which, along with Fedspeak, should influence the USD demand and provide a fresh impetus to the major.
Technical Analysis: USD/JPY seems poised to climb further, overbought RSI warrants caution for bulls near 154.00 mark
From a technical perspective, last week’s sustained breakthrough of a short-term trading range hurdle near the 152.00 mark was seen as a fresh trigger for bulls. The subsequent move-up validates the constructive outlook, though the overbought Relative Strength Index (RSI) on the daily chart makes it prudent to wait for some near-term consolidation before positioning for any further appreciating move. Nevertheless, the USD/JPY pair seems poised to prolong its recent well-established uptrend and aim toward reclaiming the 154.00 round figure.
On the flip side, any meaningful corrective decline below the 153.00 mark is likely to attract fresh buyers and remain limited near Friday’s swing low, around the 152.60 region. A convincing break below, however, could prompt some technical selling and drag the USD/JPY pair to the 152.00 mark en route to the 151.40 intermediate support and the 151.00 round figure. The latter should act as a key pivotal point, which, if broken, will suggest that spot prices have topped out in the near term and shift the bias 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.
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