Japanese Yen drifts lower amid receding safe-haven demand; bullish potential intact

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• The Japanese Yen retreats after touching a one-week high against its American counterpart. 

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• Rising bets for an imminent BoJ rate rise this year should limit any deeper losses for the JPY. 

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• The narrowing US-Japan yield differential might also lend support to the lower-yielding JPY. 

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The Japanese Yen (JPY) attracts some sellers during the Asian session on Tuesday, which, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair in staging a modest recovery from the 151.25 area or over a one-week low. Investors cheered a delay in the implementation of US President Donald Trump's reciprocal tariffs. This, in turn, is seen as a key factor undermining the safe-haven JPY. Any meaningful JPY depreciation, however, still seems elusive in the wake of rising bets for more interest rate hikes by the Bank of Japan (BoJ), bolstered by the release of robust Q4 GDP print from Japan on Monday.

Meanwhile, hawkish BoJ expectations led to a significant rise in Japanese government bond yields, to a multi-year high. Adding to this, the recent decline in the US Treasury bond yields, backed by expectations that the Federal Reserve (Fed) would cut interest rates further, has resulted in a narrowing of the US-Japan rate differential. This might further hold back traders from placing aggressive bearish bets around the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through buying before confirming that the USD/JPY pair has bottomed out and positioning for any further recovery.

Japanese Yen bulls have the upper hand amid hawkish BoJ expectations

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• US President Donald Trump said on Thursday that he plans to unveil reciprocal tariffs, which would aim at every country that charges duties on US imports, though he stopped short of giving any details. 

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• Furthermore, the optimism over talks between the US and Russia aimed at ending the war in Ukraine boosted investors' confidence and undermined demand for the safe-haven Japanese Yen on Tuesday. 

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• Against the backdrop of strong inflation figures from Japan, the solid Q4 Gross Domestic Product (GDP) released on Monday cemented the case for imminent rate hikes from the Bank of Japan this year.

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• Markets are now pricing in roughly another 37 basis points worth of increases by December, pushing the yield on the benchmark 10-year Japanese government bond to its highest level since April 2010.

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• Meanwhile, a surprise drop in US Retail Sales, along with mixed signals on inflation, suggests that the Federal Reserve could possibly cut interest rates at the September or October policy meeting. 

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• Philadelphia Fed President Patrick Harker said on Monday that the labor market is largely in balance and the current economy argues for a steady policy as inflation has been sticky over recent months.

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• Fed Board of Governors member Michelle Bowman noted that high asset prices may have impeded progress on inflation and more certainty is needed on declining inflation before reducing rates.

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• Fed Board of Governors member Christopher Waller said that inflation progress last year has been excruciatingly slow and that rate cuts would be appropriate in 2025 if inflation repeats the 2024 pattern.

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• Nevertheless, Fed Funds Futures see a 40 basis point Fed rate cut in 2025, causing the recent decline in the US Treasury bond yields and contributing to the narrowing of the US-Japan rate differential.

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• Traders look to the release of the Empire State Manufacturing Index from the US, which, along with speeches by influential FOMC members, would drive the US Dollar and the USD/JPY pair. 

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USD/JPY might struggle to build on intraday recovery beyond the 152.00 mark

From a technical perspective, last week's failure near the 50% retracement level of the January-February down leg and the subsequent slide below the very important 200-day Simple Moving Average (SMA) favors bearish traders. Moreover, oscillators on the daily chart are holding in negative territory and suggest that the path of least resistance for the USD/JPY pair is to the downside. Hence, any further move up towards the 152.00 mark could be seen as a selling opportunity, which should cap spot prices near the 152.65 region (200-day SMA). This is followed by the 100-day SMA, currently pegged near the 153.15 region, which if cleared could trigger a short-covering rally beyond the 154.00 mark, towards the 154.45-154.50 supply zone en route to last week's swing high, around the 154.75-154.80 region. 

On the flip side, the 151.25 area, or the Asian session low, now seems to act as immediate support ahead of the 151.00-150.90 zone, or the year-to-date trough touched earlier this month. A convincing break below the latter would expose the 150.00 psychological mark. Some follow-through selling should pave the way for a fall toward the 149.60-149.55 region en route to the 149.00 round figure and the December 2024 swing low, around the 148.65 region.