The Japanese Yen attracts some buyers in reaction to the upbeat domestic macro data.
Some repositioning trade ahead of the BoJ decision further weighs on the USD/JPY pair.
The fundamental backdrop warrants caution for the JPY bulls ahead of the US PCE data.
The Japanese Yen (JPY) edges higher against a softer US Dollar (USD) during the Asian session on Thursday and recovers a part of the previous day's slide to its lowest level since early April. Data released from Japan earlier today showed that Industrial Production unexpectedly grew in June, while strong Retail Sales pointed to resilience in consumer spending. This, along with some repositioning trade ahead of the crucial Bank of Japan (BoJ) policy update, offers some support to the JPY. Investors will look for signals on how the recent US-Japan trade agreement might influence the BoJ's intention to raise interest rates before the end of this year.
That said, the recent economic data from Japan indicated signs of cooling inflation. Adding to this, rising domestic political uncertainty could complicate the BoJ's policy normalization path. Hence, the focus will be on the post-meeting press conference, where comments from BoJ Governor Kazuo Ueda will influence the JPY. The USD, on the other hand, might continue to draw support from the Federal Reserve's (Fed) hawkish tone, which tempered hopes for a rate cut in September. This might contribute to limiting losses for the USD/JPY pair, warranting caution for bearish traders heading into the central bank event and ahead of the US inflation data.
Japanese Yen bears turn cautious ahead of the crucial BoJ policy decision
A preliminary government report showed this Thursday that Industrial Production in Japan rose 1.7% from the previous month in June, beating consensus estimates and signaling resilience among manufacturers despite headwinds from US trade tariffs.
A separate report revealed that Retail Sales in Japan grew for the 39th consecutive month, by 2.0% year-on-year in June. This marked a slight uptick from the previous month's downwardly revised 1.9% growth and also exceeded market expectations.
The latter signaled that Japanese private consumption remained strong despite headwinds from sticky inflation and economic uncertainty. This, along with the US-Japan trade deal, keeps hopes alive for the Bank of Japan rate hike later this year.
The ruling Liberal Democratic Party’s loss in the July 20 polls fueled concerns about Japan's fiscal health amid calls from the opposition to boost spending and cut taxes. This suggests that prospects for BoJ rate hikes could be delayed for a bit longer.
The BoJ is set to leave rates unchanged at the conclusion of a two-day meeting later this Thursday. However, the central bank's quarterly outlook report and comments from BoJ Governor Kazuo Ueda could offer cues about the tightening trajectory.
Meanwhile, the US Federal Reserve kept interest rates unchanged on Wednesday in a split decision that saw two governors dissenting for the first time since 1993. Furthermore, Fed Chair Jerome Powell tempered hopes for a rate cut in September.
Addressing reporters during the post-meeting press conference, Powell said it was too soon to say whether the Fed would cut rates at its next meeting and that the current modestly restrictive monetary policy has not been holding back the economy.
This adds to the early optimism driven by the upbeat US macro data and pushes the US Dollar to its highest level since late May. The ADP report showed that private-sector payrolls surged by 104K in July, reversing June’s 33K decline and beating estimates.
Furthermore, the Advance US Gross Domestic Product (GDP) report published by the US Commerce Department showed that the economy expanded at a 3.0% annualized pace during the second quarter, following a 0.5% contraction in the first quarter.
Thursday's US economic docket features the release of the Personal Consumption Expenditure (PCE) Price Index, which will influence the USD price dynamics and provide some impetus to the USD/JPY pair later during the North American session.
USD/JPY faces rejection near 200-day SMA; downside potential seems limited
From a technical perspective, the USD/JPY pair stalls the post-Fed move higher near the 200-day Simple Moving Average (SMA). The said barrier is pegged near the 149.55 region and should now act as an immediate hurdle. Given that oscillators on the daily chart have been gaining positive traction, sustained strength beyond should pave the way for a move towards reclaiming the 150.00 psychological mark. The momentum could extend further towards the next relevant hurdle near the 150.40 area before spot prices eventually climb to the 151.00 round figure.
On the flip side, any further corrective slide could find decent support near the 148.55 region, below which the USD/JPY pair could slide to the 148.00 mark and the overnight swing low, around the 147.80 area. Failure to defend the said support levels might then drag spot prices to the 147.00 mark en route to the 100-day SMA support, currently pegged near the 146.70 region. The latter coincides with last week's swing low, which, if broken, might shift the near-term bias in favor of bearish traders and pave the way for a slide towards testing sub-146.00 levels.
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