- The Japanese Yen fails to preserve modest gains amid doubts over more BoJ rate hikes this year.
- Verbal intervention from government authorities might help limit any meaningful JPY downfall.
- A modest USD pullback from a two-and-half-month high should further cap gains for USD/JPY.
The Japanese Yen (JPY) struggles to capitalize on modest intraday gains against its American counterpart and languishes near its lowest level since early August touched the previous day. Firming expectations that the Bank of Japan (BoJ) will refrain from raising rates again this year amid uncertainty over the new political leadership’s preference for the monetary policy cap gains for the JPY ahead of the general election on October 27.
Meanwhile, comments from Japanese authorities fueled speculations about a possible government intervention. This, along with expectations that stronger domestic inflation could provide the BoJ room to raise interest rates should limit the downside for the JPY. Furthermore, a modest US Dollar (USD) pullback from a two-and-half-month top should contribute to keeping a lid on any meaningful appreciating move for the USD/JPY pair.
Daily Digest Market Movers: Japanese Yen traders seem reluctant amid mixed fundamental cues
- Japan’s vice finance minister for international affairs, or the top currency diplomat, Atsushi Mimura noted this Friday that the recent moves in the Japanese Yen are somewhat rapid and one-sided and that excess volatility in the FX market is undesirable.
- Moreover, a spokesman for the Japanese government said that it is important for currencies to move in a stable manner reflecting fundamentals and that authorities are closely watching FX moves with a high sense of urgency, including speculative moves.
- Government data released earlier today showed that Japan’s headline Consumer Price Index (CPI) decelerated to the 2.5% year-on-year (YoY) rate in September and the Core CPI, which excludes volatile fresh food items, eased from a 10-month high.
- Against the backdrop of a surprise opposition to further rate hikes from Japan’s Prime Minister Shigeru Ishiba, signs of easing inflationary pressures raise doubts over just how much headroom the Bank of Japan will have to keep raising interest rates.
- The markets, meanwhile, reacted little to the Chinese macro data, which showed that the economy expanded by 0.9% in the third quarter of 2024 and the annual growth rate stood at 4.6%, while Retail Sales and Industrial Production surpassed estimates.
- Thursday upbeat US data suggested that the economy remains on solid footing and reaffirmed bets for a less aggressive easing by the Federal Reserve, which keeps the US Treasury bond yields elevated and acts as a tailwind for the US Dollar.
- The USD Index (DXY), which tracks the Greenback against a basket of currencies, stands tall near its highest level since early August and should act as a tailwind for the USD/JPY pair, warranting some caution before positioning for deeper losses.
- Moving ahead, the US housing market data – Building Permits and Housing Starts – and Fed Governor Christopher Waller’s scheduled speech later during the North American session might produce short-term trading opportunities heading into the weekend.
Technical Outlook: USD/JPY could aim to challenge August swing high above the 150.30 region
From a technical perspective, the overnight breakout above the 150.00 psychological mark, or the top boundary of a three-day-old range held since the beginning of the week, could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside.
Hence, any subsequent slide might still be seen as a buying opportunity and is more likely to find decent support near the 149.20 area. This is closely followed by the 149.00 round figure, below which the USD/JPY pair could accelerate the corrective fall to the 148.60-148.55 region en route to the 148.00 mark and last week’s swing low, around the 147.35-147.30 zone. The latter should act as a key pivotal point, which if broken might shift the bias in favor of bearish traders.
On the flip side, momentum above the overnight swing high, around the 150.30 area, could extend further towards the August monthly swing high, around the 150.85-150.90 region. Some follow-through buying beyond the 151.00 mark will reinforce the positive outlook for the USD/JPY pair and pave the way for a further near-term appreciation towards the 152.00 neighborhood.
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.