USD/JPY consolidates in a familiar rage, holds comfortably above 147.00 mark
- USD/JPY extends its sideways consolidative price move in a one-week-old trading range.
- The BoJ rate-hike uncertainty and a positive risk tone undermine the JPY, lending support.
- Bets for bigger Fed rate cuts keep the USD bulls on the defensive and act as a headwind.
The USD/JPY pair struggles to capitalize on the previous day's goodish rebound from the 146.00 round figure, or the weekly low and oscillates in a narrow trading band during the Asian session on Thursday. Spot prices, however, hold comfortably above the 147.00 mark and remain confined in a one-week-old range as traders await fresh catalysts before positioning for a firm near-term direction.
The uncertainty over the likely timing of when the Bank of Japan (BoJ) will hike interest rates again is holding traders back from placing aggressive bets and leading to the USD/JPY pair's range-bound price action. In fact, the Japanese central bank lifted the key interest rate to around 0.25%, or the highest since 2008, at the end of the July policy meeting and outlined a plan to taper its bond-buying program.
Adding to this, BoJ Governor Kazuo Ueda said that the central bank will keep raising rates, and adjust the degree of easing if the current economic and price outlook is realized. The view was echoed by the summary of opinions from the July BoJ policy meeting. That said, BoJ Deputy Governor Shinichi Uchida played down the chances of a near-term rate hike amid the recent volatility in the financial markets.
Apart from this, a generally positive risk tone undermines demand for the safe-haven JPY and continues to offer some support to the USD/JPY pair. The upside, however, remains capped in the wake of bets for bigger interest rate cuts by the Federal Reserve (Fed), bolstered by signs of cooling inflationary pressures in the US, which keeps the USD bulls on the defensive and acts as a headwind.
Moving ahead, investors now look forward to the US economic docket – featuring the release of monthly Retail Sales figures, the usual Weekly Initial Jobless Claims, the Empire State Manufacturing Index and the Philly Fed Manufacturing Index. Apart from this, the US bond yields will drive the USD, which, along with the broader risk sentiment, should provide some impetus to the USD/JPY pair.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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