USD/JPY returns below 147.00 amid generalized Dollar weakness
- The US Dollar gives away previous gains to test two-week lows at the 146.60 area
- US Government's shutdown and downbeat employment data are keeping the US Dollar's rallies limited.
- Increasing bets on BoJ tightening are underpinning JPY's bullish trend.
The US Dollar has reversed earlier gains against the Japanese Yen, and retreated below the 147.00 level on the European morning session, turning negative on daily charts and hitting session lows at 146.75 so far.
The pair has come under increasing bearish pressure, with the US Dollar losing ground across the board. The Dollar remains vulnerable amid concerns about the consequences of the US government shutdown and weak labor figures, which have added pressure on the Fed to ease its monetary policy further.
ADP private payroll’s data released on Wednesday showed a 32K decline in net employment in September, against market expectations of a 50K increase. Furthermore, August’s reading was revised to a 3K drop, from the 54K gain previously estimated.
These figures have raised investors’ bets on immediate Fed easing. A quarter-point rate cut in October is seen as a done deal, and chances of another such cut in December have risen to 86%, from 60% last week.
The Yen, on the other hand, remains buoyed by the hawkish summary of opinions released by the BoJ earlier this week. The report indicates that the board considered the possibility of raising interest rates, which has boosted hopes that the bank might tighten its monetary policy after the Liberal Democratic Party appoints a new prime minister at this weekend’s elections.
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 embarked in an ultra-loose monetary policy in 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. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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