Japanese Yen holds mild gains as upbeat GDP data backing further rate hike

• The Japanese Yen edges higher due to rising odds of the BoJ adopting a hawkish stance amid upbeat GDP data.
• Japan's Gross Domestic Product increased by 0.8% in Q2, marking the strongest quarterly growth since Q1 of 2023.
• The US Dollar appreciates due to improved Treasury yields despite rising expectations of the Fed’s rate cut in September.

The Japanese Yen (JPY) gains ground against the US Dollar (USD) on Thursday. This upside occurred as Japan’s Gross Domestic Product (GDP) growth for the second quarter surpassed expectations, supporting the argument for a potential near-term interest rate hike by the Bank of Japan (BoJ).

Japanese Economy Minister Yoshitaka Shindo stated that the economy is anticipated to recover gradually as wages and income improve. Shindo also added that the government will collaborate closely with the Bank of Japan to implement flexible macroeconomic policies.

However, the USD/JPY pair received support from the improved US Dollar amid higher Treasury yields. However, the potential for further gains in the Greenback may be constrained by increasing expectations of at least a 25 basis point rate cut by the US Federal Reserve (Fed) in September.

The moderate US Consumer Price Index (CPI) data has sparked debate about the extent of the Fed’s potential rate cut in September. Traders are favoring a more modest 25 basis point reduction, with a 60% probability, while a 50 basis point cut is still on the table. According to CME FedWatch, there is a 36% chance of the larger cut occurring in September.

Daily Digest Market Movers: Japanese Yen declines despite upbeat GDP data

• Japan's Gross Domestic Product (GDP) grew by 0.8% quarter-on-quarter in Q2, surpassing market forecasts of 0.5% and rebounding from a 0.6% decline in Q1. This marked the strongest quarterly growth since Q1 of 2023. Meanwhile, the annualized GDP growth reached 3.1%, exceeding the market consensus of 2.1% and reversing a 2.3% contraction in Q1. This was the strongest yearly expansion since Q2 of 2023.
• Federal Reserve Bank of Chicago President Austan Goolsbee expressed growing concern on Wednesday about the labor market rather than inflation, noting recent improvements in price pressures alongside weak jobs data. Goolsbee added that the extent of rate cuts will be determined by the prevailing economic conditions, per Bloomberg.
• US headline Consumer Price Index (CPI) rose 2.9% year-over-year in July, slightly down from the 3% increase in June and below market expectations. The Core CPI, which excludes food and energy, climbed 3.2% year-over-year, a slight decrease from the 3.3% rise in June but aligned with market forecasts.
• Japanese Prime Minister Fumio Kishida announced at a press conference on Wednesday that he will not seek re-election as the leader of the Liberal Democratic Party (LDP) in September. Kishida emphasized the need to combat Japan's deflation-prone economy by promoting wage and investment growth and achieving the goal of expanding Japan's GDP to ¥600 trillion.
• Rabobank's senior FX strategist, Jane Foley, observes that this week's series of US data releases, along with next week's Jackson Hole event, should provide the market with clearer insights into the potential responses of US policymakers. However, their main expectation is that the Fed will reduce rates by 25 basis points in September and likely cut them again before the end of the year.
• On Tuesday, Atlanta Fed President Raphael Bostic stated that recent economic data has increased his confidence that the Fed can achieve its 2% inflation target. However, Bostic indicated that additional evidence is required before he would support a reduction in interest rates, according to Reuters.
• Japan's parliament is scheduled to hold a special session on August 23 to discuss the Bank of Japan's (BoJ) decision to raise interest rates last month. BoJ Governor Kazuo Ueda is expected to attend the session, according to government sources cited by Reuters.
• The Bank of Japan’s Summary of Opinions from the Monetary Policy Meeting on July 30 and 31 indicated that several members believe economic activity and prices are evolving as expected by the BoJ. They are aiming for a neutral rate of "at least around 1%" as a medium-term target.

Technical Analysis: USD/JPY holds ground near 147.50 with testing the nine-day EMA barrier

USD/JPY trades around 147.40 on Thursday. The daily chart analysis shows that the pair consolidates within a descending channel, which suggests a bearish bias. Additionally, the 14-day Relative Strength Index (RSI) is positioned slightly above the 30 level, suggesting a potential for a correction.

In terms of support levels, the USD/JPY pair may test the lower boundary of the descending channel around the 142.50 level. A break below this channel could reinforce the bearish bias, potentially driving the pair toward a seven-month low of 141.69, reached on August 5. Further downside could see the pair approaching a secondary support level at 140.25.

On the upside, the USD/JPY pair may encounter immediate resistance at the nine-day Exponential Moving Average (EMA) around the 147.53 level, followed by the upper boundary of the descending channel near 149.00. A breakout above the descending channel could reduce bearish momentum and allow the pair to approach the 50-day EMA at 153.40 level, with the potential to test the resistance level at 154.50, where previous support has now turned into resistance.

USD/JPY: Daily Chart