- The Japanese Yen weakens across the board in reaction to BoJ Governor Ueda’s dovish remarks.
- Bets for an imminent shift in the BoJ’s policy stance should limit any further depreciating move.
- Traders might also prefer to wait on the sidelines ahead of the US consumer inflation figures.
The Japanese Yen (JPY) comes under heavy selling pressure during the Asian session on Tuesday and reverses a part of the recent strong gains to its highest level since early February touched last week. Comments by Japan’s Finance Minister Shunichi Suzuki suggested that now is not the time for the Bank of Japan (BoJ) to tighten the monetary policy. Adding to this, BoJ Governor Kazuo Ueda said there was some weakness seen in the incoming macro data, which, along with a positive risk tone, is seen undermining the JPY.
Investors, however, seem convinced that another substantial pay hike in Japan will fuel consumer spending and demand-driven inflation, which should allow the BoJ to pivot away from its ultra-loose policy setting as early as the March 18-19 meeting. This could help limit any meaningful downside for the JPY, which, along with subdued US Dollar (USD) price action, should cap gains for the USD/JPY pair. Traders also seem reluctant to place aggressive directional bets ahead of the release of the latest US consumer inflation figures.
Daily Digest Market Movers: Japanese Yen sticks to losses inspired by BoJ Governor Ueda’s remarks
- Japan’s Finance Minister Shunichi Suzuki said that positive developments are seen in Japan’s economy, though a stage has not been reached where Japan can avoid falling back into deflation.
- Bank of Japan Governor Kazuo Ueda noted that the focus is on whether a positive wage-inflation cycle is kicking off, in judging whether sustained, stable achievement of the price target is coming into sight.
- Investors, however, seem convinced that the BoJ might end the negative interest rates as early as the March 18-19 meeting, which might continue to act as a tailwind for the Japanese Yen.
- Inflation in Tokyo moved back above the BoJ’s 2% target in February and an upward revision of the Q4 GDP print suggested that Japan’s economy avoided a technical recession.
- Data released this Tuesday showed that the Producer Price Index in Japan rose 0.2% MoM in February vs. a flat reading last month and the yearly rate climbed from 0.2% to 0.6%.
- Adding to this, the ongoing annual wage negotiations is expected to yield bumper pay hikes for the second straight year, which should allow the BoJ to pivot away from its ultra-dovish stance.
- The US Dollar continues with its struggle to attract any meaningful buyers amid growing acceptance that the Federal Reserve will start easing its monetary policy in the coming months.
- The bets were reaffirmed by the mixed US monthly jobs report on Friday, which showed a spike in the unemployment rate to a two-year high and kept the door open for a June rate cut.
- The yield on the benchmark 10-year US government bond touched a five-week low on Monday and languishes near the 4.0% mark, which further keeps the USD bulls on the defensive.
- Traders now look to the US consumer inflation figures for cues about the likely timing and the pace of the Fed’s rate-cutting cycle before placing fresh directional bets around the USD/JPY pair.
- The headline CPI is anticipated to edge higher to 0.4% in February and the yearly rate is expected to hold steady at 3.1%, while the Core CPI is seen easing to the 3.7% YoY rate from 3.9% previous.
Technical Analysis: USD/JPY struggles to capitalize on intraday gains, remains below the 100-day SMA
From a technical perspective, the USD/JPY pair has been showing some resilience below the 38.2% Fibonacci retracement level of the December-February rally, warranting some caution for bearish traders. That said, the recent breakdown through the 100-day Simple Moving Average (SMA), the formation of a double-top pattern ahead of the 152.00 mark and bearish oscillators suggest that the path of least resistance for spot prices is to the downside.
Hence, any meaningful recovery beyond the 147.00 mark is likely to confront stiff resistance and remain capped near the 100-day SMA support breakpoint, near mid-147.00s. A sustained strength beyond, however, could lift the USD/JPY pair beyond the 148.00 mark, towards testing the next relevant hurdle near the 148.65-148.70 region. The momentum could extend further towards the 149.00 mark en route to the 149.25 horizontal support-turned-resistance.
On the flip side, bears need to wait for acceptance below the 38.2% Fibo. level before placing fresh bets. Some follow-through selling below the 200-day SMA, currently pegged near the 146.30-146.25 region, will mark a fresh breakdown and make the USD/JPY pair vulnerable. The subsequent downfall has the potential to drag spot prices below the 146.00 round-figure mark, towards the 50% Fibo. level, around the 145.60 zone.
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-trades-just-below-its-highest-level-since-early-february-as-traders-look-to-us-cpi-202403120144