Japanese Yen seems vulnerable against USD, hangs near its lowest level since early August
|- The Japanese Yen fails to capitalize on its modest Asian session uptick against the US Dollar.
- The BoJ rate-hike uncertainty and the upbeat market mood cap gains for the safe-haven JPY.
- Bets for smaller interest rate cuts by the Fed underpin the USD and favor the USD/JPY bulls.
The Japanese Yen (JPY) struggles to preserve modest Asian session gains against its American counterpart and languishes near the lowest level since early August touched on Monday. Investors have been scaling back their expectations for more interest rate hikes by the Bank of Japan (BoJ) in 2024. This, along with the prevalent risk-on environment, turns out to be key factors undermining demand for the safe-haven JPY.
Meanwhile, firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and bets for a regular 25 basis points (bps) rate cut in November keep the US Treasury bond yields elevated. This assists the US Dollar (USD) to stand tall near a two-month peak and contributes to capping gains for the lower-yielding JPY, lifting the USD/JPY pair back closer to the 150.00 psychological mark in the last hour.
Daily Digest Market Movers: Japanese Yen bulls remain on the sidelines amid elevated US bond yields and risk-on mood
- Japanese Prime Minister Shigeru Ishiba's recent comments successfully pushed back market expectations for any further interest rate increases by the Bank of Japan (BoJ) in the near term.
- US equity indices carried forward the upward momentum on Monday, with the S&P 500 and the Dow Jones Industrial Average hitting new record highs amid hopes for solid earnings.
- The US Dollar built on its recent gains registered over the past two weeks or so and shot to its highest level since August 8 amid bets for smaller interest rate cuts by the Federal Reserve.
- Minneapolis Fed President Neel Kashkari said on Monday that the recent jobs data shows labor market isn't weakening and the path of policy to be driven by data, the economy's performance.
- Separately, Fed Governor Christopher Waller noted the US central bank should proceed with more caution on interest rate cuts than was needed at the September policy meeting.
- According to the CME Group's FedWatch Tool, traders are pricing in a greater chance of a regular 25 basis points rate reduction in November and over a 15% probability of a no-cut.
- A quick increase in 10-year US government bond yields over the last few weeks to levels beyond the 4% threshold favors the USD bulls and should cap the low-yielding Japanese Yen.
- Traders now look to the release of the Empire State Manufacturing Index for some impetus later during the North American session ahead of speeches by influential FOMC members.
Technical Outlook: USD/JPY bulls need to wait for move beyond the 150.00 psychological mark before placing fresh bets
From a technical perspective, any further slide is more likely to attract dip-buying near the 149.00 mark. This might help limit the downside for the USD/JPY pair near the 148.55-148.50 region. The latter is likely to act as a key pivotal point, which if broken might prompt aggressive selling and drag spot prices below the 148.00 round figure, towards last week's swing low, around the 147.35-147.30 area.
On the flip side, sustained strength and acceptance above the 150.00 psychological mark will be seen as a fresh trigger for bullish traders. Given that oscillators on the daily chart are holding in positive territory and are still away from being in the overbought zone, the USD/JPY pair might then aim to challenge the August monthly swing high, around the 150.85-150.90 region. Some follow-through buying beyond the 151.00 round figure will suggest that spot prices have bottomed out and pave the way for a further near-term appreciating move.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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