Japanese Yen depreciates on dovish BoJ expectations

• The Japanese Yen edges lower as the BoJ is widely expected to leave interest rates unchanged on Friday.
• The downside for the Japanese Yen could be limited as investors' caution prevails ahead of the BoJ policy decision on Friday.
• CME FedWatch Tool indicates that the likelihood of a Fed rate cut in September decreased to 61.5%, down from 69.4% a week earlier.

The Japanese Yen (JPY) edges down against the US Dollar (USD) on Thursday following a hawkish hold from the US Federal Reserve (Fed) which boosted the USD/JPY pair. The Federal Open Market Committee (FOMC) left its benchmark lending rate in the range of 5.25%–5.50% for the seventh consecutive time in its policy meeting on Wednesday, as widely anticipated.

The Japanese Yen may see limited downside as caution prevails ahead of the Bank of Japan’s (BoJ) policy decision on Friday. While the BoJ is widely expected to leave interest rates unchanged, traders will be closely monitoring any announcements regarding a potential reduction in the central bank's monthly bond purchases.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, recovers its recent losses. This recovery can be attributed to the hawkish stance of the Federal Reserve. FOMC policymakers now anticipate just one rate cut this year, down from the three that were projected in March.

The CME FedWatch Tool indicates that the likelihood of a Fed rate cut in September by at least 25 basis points has decreased to 61.5, down from 69.4% a week earlier.

Investors await the US weekly Initial Jobless Claims and Producer Prices Index (PPI) on Thursday to gain further impetus on economic conditions in the United States (US).

Daily Digest Market Movers: Japanese Yen declines as Fed adopts a hawkish stance

• In a press conference following the Fed's decision, Fed Chair Jerome Powell remarked that the restrictive stance on monetary policy is producing the expected effects on inflation.
• The US Consumer Price Index (CPI) rose 3.3% year-over-year in May, slightly below both the previous reading and expectations of 3.4%. The core CPI, which excludes volatile food and energy prices, increased by 3.4% year-over-year in May, compared to a 3.6% rise in April and an estimated 3.5%.
• Japanese Producer Price Index (PPI) data showed that producer prices jumped 2.4% year-on-year in May, exceeding market expectations of a 2.0% rise, fueling concerns that this might lead to higher consumer inflation.
• Japan Finance Minister Shunichi Suzuki said on Tuesday it is important to continue efforts to achieve economic growth and attain fiscal health to retain confidence in the country's fiscal policy, per Reuters.
• Nearly two-thirds of economists surveyed in a Reuters poll on Tuesday anticipate that the Bank of Japan will opt to commence tapering its monthly bond purchases at Friday's policy meeting. This decision marks a significant initial move aimed at gradually reducing the central bank's burgeoning balance sheet.
• Takeshi Minami, Chief Economist at Norinchukin Research Institute said, "There is no longer any reason to continue large-scale purchases of government bonds since it has been judged that a 2% rise in prices is within reach," per Reuters.
• According to Reuters, while speaking to parliament last week, Bank of Japan (BoJ) Governor Kazuo Ueda stated that inflation expectations are gradually rising but have yet to reach 2%. "We have been scrutinizing market developments since the March decision. As we proceed to exit our massive monetary stimulus, it's appropriate to reduce bond purchases," Ueda said.

Technical Analysis: USD/JPY could test the key level of 157.00

USD/JPY trades around 156.90 on Thursday. Analysis of the daily chart indicates a bullish inclination as the pair consolidates within an ascending channel pattern. Moreover, the 14-day Relative Strength Index (RSI) is above the 50 level, suggesting a tendency for upward momentum.

An immediate hurdle is noticeable at the psychological level of 157.00. A breakthrough above this level could provide support, potentially guiding the USD/JPY pair toward the vicinity of the significant level of 158.00, following the upper boundary near 158.80. Further resistance is observed at 160.32, marking its highest level in over thirty years.

On the downside, the lower boundary of the ascending channel is near the 50-day Exponential Moving Average (EMA) at 155.09. A breach below this level could intensify downward pressure on the USD/JPY pair, potentially driving it toward the throwback support area around 152.80.

USD/JPY: Daily Chart