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Analysis

Yen soars as Powell signals rate cuts on the way

The Japanese yen has started the week with slight gains. In the European session, USD/JPY is trading at 144.15, down 0.16% on the day at the time of writing.

On Friday, the yen shot up 1.3%, as the US dollar was pummeled by the major currencies following Federal Chair Jerome Powell’s speech at the Jackson Hole Symposium.

Powell says Fed poised to cut rates

The markets eagerly awaited Jerome’s Powell’s speech at Jackson Hole and heard what they were looking for – an endorsement for a milestone rate cut. Powell said “the time has come for policy to adjust” but didn’t say when, noting that the timing and pace of rate cuts would depend on the economic outlook and the incoming data. Still, there’s little doubt that next month the Fed will deliver its first rate cut since March 2020, at the onset of the Covid pandemic. The market’s response to Powell’s remarks sent that US dollar sharply lower on Friday against the major currencies.

The markets have fully priced in a rate cut in September. Just one month ago, the odds of a 25-basis point cut stood at 88% and 12% for a cut of 50 bps, according to the CME’s FedWatch. Since then, the US economy has posted some weaker-than-expected data and the probability currently stands at 63.5% for a 25-bps cut vs. 36.5% for a 50 bps move.

The odds could move sharply once again after the US releases the employment report on Sept. 6, two weeks ahead of the Fed meeting. A weak jobs report could rattle investors and push the Fed to respond with a 50-bps cut.

In Japan, inflation will be in focus with the release of BoJ Core CPI for July. The index is expected to remain unchanged at 2.1%. Inflation has been moving higher in Japan, making the Bank of Japan an outlier among major central banks as it looks to normalize policy by raising interest rates.

USD/JPY technical

  • USD/JPY tested support at 143.37 earlier. Below, there is support at 142.49.

  • There is resistance at 144.93 and 145.81.

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