Japanese Yen slides to nearly one-week low against rebounding USD; downside seems limited
- The Japanese Yen drifts lower for the third straight day amid the BoJ rate hike uncertainty.
- A modest USD rebound contributes to the USD/JPY pair’s positive move to a multi-day high.
- The divergent BoJ-Fed policy expectations might cap the pair ahead of key US macro data.
The Japanese Yen (JPY) trades with a negative bias for the third consecutive day against a rebounding US Dollar (USD), lifting the USD/JPY pair to a nearly one-week high, around the 147.65 area during the Asian session on Tuesday. The uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) is seen as a key factor undermining the JPY. That said, investors seem convinced that the BoJ will stick to its policy normalization path, which in turn warrants some caution before positioning for any further JPY depreciation.
Apart from this, the cautious market mood and escalating geopolitical tensions might contribute to limiting losses for the safe-haven JPY. The USD, on the other hand, might struggle to attract any meaningful buyers amid bets that the Federal Reserve (Fed) will lower borrowing costs in September and deliver at least two rate cuts by the year-end. The outlook marks a significant divergence in comparison to hawkish BoJ expectations and should help limit deeper losses for the lower-yielding JPY, which, in turn, might keep a lid on the USD/JPY pair.
Japanese Yen drifts lower amid the uncertainty over the likely timing of the next BoJ rate hike
- Asian stocks posted modest gains at the open on Tuesday amid a surge in China's CSI 300 Index, which contributes to the safe-haven Japanese Yen's underperformance against its American counterpart for the third straight day.
- Capital Spending data released from Japan on Monday indicated a pickup in business investments in the second quarter. This could bolster the labour market and demand-driven inflation, reaffirming Bank of Japan rate hike bets.
- In contrast, traders are pricing in a nearly 90% chance that the Federal Reserve will lower borrowing costs by 25 basis points in September, which marks a significant divergence in comparison to hawkish BoJ expectations.
- Moreover, market participants see a greater chance that the US central bank will cut interest rates twice by the end of this year. This, along with concerns about the Fed's independence, keeps the US Dollar bulls on the defensive.
- US Treasury Secretary Scott Bessent, speaking during a Reuters interview, defended President Donald Trump’s removal of Fed Governor Lisa Cook and argued that allegations of mortgage fraud against her warranted scrutiny.
- Cook, however, refused to step down and has filed a lawsuit. Meanwhile, Cook's departure would give Trump another appointment to the Fed's seven-member board and command a majority for the first time in decades.
- Moreover, Trump has repeatedly criticized Fed Chair Jerome Powell for not cutting rates more aggressively. Nevertheless, the development has raised concerns about the central bank's autonomy and could weigh on the USD.
- A busy week of important US macro releases scheduled at the start of a new month kicks off with the ISM Manufacturing PMI, which might influence the USD price dynamics and influence the USD/JPY pair later this Tuesday.
- Investors will also confront the release of the US JOLTS Job Openings on Wednesday, followed by the ADP report on private-sector employment and ISM Services PMI on Thursday, and the Nonfarm Payrolls (NFP) report on Friday.
USD/JPY is more likely to attract fresh sellers and remain capped near the 148.00 round figure
From a technical perspective, the USD/JPY pair's move up over the past three days validates a support marked by the lower boundary of a four-week-old trading range, around the 146.70 region. The said area should act as a key pivotal point, which, if broken decisively, could drag spot prices to the August swing low, around the 146.20 area, en route to the 146.00 mark. Some follow-through selling will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
On the flip side, any further move up could attract fresh sellers and remain capped ahead of the 148.00 round figure, which represents the top end of the multi-week-old trading band. A sustained strength beyond could prompt a short-covering rally towards the recent swing high, around the 148.75-148.80 region. The latter nears the 200-day Simple Moving Average (SMA). Hence, some follow-through buying might shift the near-term bias in favor of the USD/JPY bulls.
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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