162.00: Japanese Yen rebounds as key support holds
- USD/JPY trades slightly lower to near 161.55 as the US Dollar corrects.
- The odds of the Fed delivering at least two interest rate hikes this year have diminished slightly.
- Investors expect the BoJ to continue raising interest rates this year.
The US Dollar (USD) struggles to extend its advance against the Japanese Yen (JPY) above 162.00 for almost a week. The USD/JPY pair is failing to gain further as the US Dollar corrects due to easing market expectations for at least two interest rate hikes by the Federal Reserve (Fed) this year.
At press time, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, trades marginally lower to near 101.35. The DXY has corrected from its over-a-year high of 101.80 posted on Wednesday.
According to the CME FedWatch tool, the odds of the Fed delivering at least two interest rate hikes this year are 41.7%, down from 50.2% seen a week ago.
The prospects of at least two interest rate hikes by the Fed this year have eased as oil prices have returned close to pre-war levels amid an increase in energy flows through the Strait of Hormuz, a critical chokepoint to almost 20% of global energy supply.
However, Fed officials still believe that US inflation will remain elevated for a longer period. On Thursday, New York Fed Bank President John Williams said in a speech that the monetary policy is “well-positioned” and pushed back hopes of price pressures returning to the 2% target before 2028.
Meanwhile, the Japanese Yen trades higher against its peers amid expectations that the Bank of Japan (BoJ) will deliver more interest rate hikes this year. The BoJ Summary of Opinions (SoP) of the June meeting, released on Wednesday, showed that one board member said Japan's policy rate must be brought “closer to the estimated neutral rate of around 2% as soon as possible”.
USD/JPY technical analysis
Bias: USD/JPY trades slightly lower at around 161.55 at press time; however, the near-term bias is bullish as it stays above the 20-period exponential moving average (EMA), which is at 160.73.
Momentum: Momentum remains strong, with the 14-period Relative Strength Index (RSI) near 67, indicating persistent buying pressure but also hinting at increasingly overbought conditions after the recent advance.
Resistance: The 162.00 is acting as a key barrier for the US Dollar bulls; above that the pair can extend its advance towards 163.00 and 164.00.
Support: On the downside, immediate support is located at the 20-day EMA at 160.73, which would be the first line of defense on any pullback. A sustained break beneath this level would lead to a further decline towards 160.00.
(The technical analysis of this story was written with the help of an AI tool.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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