USD/JPY steadily climbs to 154.35 area amid risk-on mood, lacks follow-through buying
|- USD/JPY kicks off the new week on a positive note, though the upside potential seems limited.
- A positive risk tone dents demand for the safe-haven JPY and lends some support to the major.
- Traders might now prefer to wait for the crucial BoJ and Fed policy decisions on Wednesday.
The USD/JPY pair attracts fresh buyers during the Asian session on Monday and jumps to the 154.35 region in the last hour amid some repositioning trade ahead of this week's key central bank event risks.
The Bank of Japan (BoJ) and the Federal Reserve (Fed) are scheduled to announce their policy decisions at the end of a two-day meeting on Wednesday. In the meantime, the risk-on impulse – as depicted by a strong bullish sentiment surrounding the global equity markets – undermines the safe-haven Japanese Yen (JPY) and assists the USD/JPY pair in regaining positive traction. Any further appreciating move, however, seems elusive in the wake of the divergent BoJ-Fed policy expectations.
The BoJ is expected to reduce bond buying and potentially raise interest rates. In contrast, the markets have fully priced the possibility for an imminent start of the Fed's policy-easing cycle in September and a total of three interest rate cuts by the end of this year. The bets were reaffirmed by the release of the US Personal Consumption Expenditures (PCE) Price Index on Friday, which underscored an improving inflation environment and kept the US Dollar (USD) bulls on the defensive.
Hence, it will be prudent to wait for strong follow-through buying before confirming that the USD/JPY pair has bottomed out and positioning for an extension of the recent bounce from sub-152.00 levels, or the lowest since early May. Even from a technical perspective, last week's breakdown through the 100-day Simple Moving Average (SMA) was seen as a fresh trigger for bears, though a slightly oversold Relative Strength Index (RSI) on the daily chart prompted some short-covering.
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 has embarked in an ultra-loose monetary policy since 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.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. Still, the Bank judges that the sustainable and stable achievement of the 2% target has not yet come in sight, so any sudden change in the current policy looks unlikely.
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