- The Japanese Yen struggles to register any recovery amid the divergent BoJ-Fed expectations.
- A positive risk tone also undermines the JPY, though intervention fears help limit further losses.
- Traders also seem reluctant ahead of this week’s key central bank event risk and US macro data.
The Japanese Yen (JPY) remains on the back foot against its American counterpart and trades near a multi-decade low during the Asian session on Wednesday. The Bank of Japan’s (BoJ) cautious approach towards further policy normalization marks a big divergence in comparison to expectations that the Federal Reserve (Fed) will delay cutting interest rates amid sticky inflation. This, along with a generally positive risk tone, bolstered by easing geopolitical tensions in the Middle East, turn out to be key factors that continue to undermine the safe-haven JPY.
The JPY bears, however, remain on alert amid the possibility that Japanese authorities will intervene in the markets to prop up the domestic currency. Moreover, the US Dollar (USD) remains depressed near its lowest level in over a week in the wake of Tuesday’s disappointing US PMIs for April, which might further contribute to capping the upside for the USD/JPY pair. Traders also seem reluctant ahead of the crucial BoJ decision and important US macro data – the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index.
Daily Digest Market Movers: Japanese Yen is undermined by BoJ’s uncertain rate outlook, positive risk tone
- 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.
- Hopes that the Iran-Israel conflict will not escalate further, ease geopolitical tensions in the Middle East, and remain supportive of a generally positive risk tone, which turns out to be another factor undermining the safe-haven JPY.
- The JPY bulls shrugged off a survey by the Finance Ministry, showing that about 70% of companies in Japan will raise pay scale in the fiscal year 2024 and that about 40% of firms were struggling with labor shortages even after raising wages.
- The recent verbal warnings from Japanese officials that they would intervene in the markets to stem any further weakness in the domestic currency hold back bearish traders from placing fresh bets and help limit deeper losses.
- 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 Dollar is pressured by weaker US PMI figures for April, released on Tuesday, indicating that the economic upturn lost momentum at the start of the second quarter and contributed to keeping a lid on the USD/JPY pair.
- The S&P Global Composite Purchasing Managers Index (PMI) fell to 50.9 in April’s flash estimate, suggesting that the business activity in the US private sector continued to expand, albeit at a softer pace than in the previous month.
- Meanwhile, the S&P Global Manufacturing PMI dropped to 49.9 from 51.9 in April, highlighting a contraction in business activity, while the gauge for the services sector declined to 50.9 from March’s final reading of 51.7.
- Investors, however, seem convinced that the Federal Reserve is unlikely to begin its rate-cutting cycle in June and have also scaled back their expectations about the total number of rate cuts in 2024 to less than two.
- Traders now look to Wednesday’s release of the US Durable Goods Orders, though the focus remains on the Advance Q1 GDP and the Personal Consumption Expenditures (PCE) Price Index on Thursday and Friday, respectively.
Technical Analysis: USD/JPY bulls await breakout through short-term range and the 155.00 psychological mark
From a technical perspective, the range-bound price action witnessed over the past week or so could be categorized as a bullish consolidation phase against the backdrop of the recent blowout rally from the March swing low. However, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions and warrants some caution.
This, in turn, suggests that the USD/JPY pair is more likely to extend its consolidative price move or witness a modest pullback before the next leg up. That said, any meaningful corrective slide is likely to find decent support near the 154.55-154.45 region ahead of the 154.00 mark. The latter should act as a key pivotal point, which, if broken, could drag spot prices back towards last Friday’s low, around the 153.60-153.55 area.
On the flip side, the multi-decade high, just ahead of the 155 psychological mark, might continue to offer some resistance to the USD/JPY pair. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders and set the stage for an extension of a nearly two-month-old upward trajectory.
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.
Source: https://www.fxstreet.com/news/japanese-yen-extends-its-consolidative-price-move-near-multi-decade-low-against-usd-202404240155