Japanese Yen retains intraday negative bias amid doubts over BoJ's rate-hike plan

The Japanese Yen struggles to capitalize on Friday’s modest recovery gains against the US Dollar.
Doubts over BoJ’s rate hike plan and elevated US bond yields weigh on the lower-yielding JPY.
Traders now look to the US Consumer Confidence Index for short-term impetus later this Monday.

The Japanese Yen (JPY) remains on the back foot against its American counterpart through the first half of the European session on Monday, albeit it lacks follow-through selling. Investors remain sceptical about the Bank of Japan's (BoJ) intentions to hike rates further, which, along with a generally positive risk tone, seems to undermine the safe-haven JPY. Furthermore, the recent widening of the US-Japan yield differential, bolstered by the Federal Reserve's (Fed) hawkish shift, exerts additional on the lower-yielding JPY.

Meanwhile, strong inflation data released from Japan on Friday left the door open for a potential interest rate hike by the BoJ in January or March. Apart from this, geopolitical risks, trade war fears and speculations that Japanese authorities could intervene to prop up the domestic currency might hold back traders from placing aggressive bearish bets around the JPY. That said, the emergence of some US Dollar (USD) dip-buying acts as a tailwind for the USD/JPY pair ahead of the release of the US Consumer Confidence Index.

Japanese Yen seems vulnerable amid uncertainty on BoJ's rate hike timing

The Bank of Japan last week decided to keep the short-term rate target unchanged at the end of the December policy meeting and offered few clues on how soon it could push up borrowing costs.
Japanese government bond yields dropped to the lowest in a month on Friday in reaction to BoJ Governor Kazuo Ueda's dovish signals and a very cautious tone on further monetary policy tightening.
The benchmark 10-year US government bond yield rose to its highest level in more than six months last week and the resultant widening of the US-Japan yield differential undermines the Japanese Yen.
A government report showed on Friday that Japan's National Consumer Price Index (CPI) rose more than expected in November, which bodes well with further BoJ interest rate hikes in early 2025.
The US Dollar retreated from a two-year high on Friday after the Personal Consumption Expenditure (PCE) Price Index pointed to signs of inflation moderation and lingering challenges for the economy.
According to a report published by the US Bureau of Economic Analysis (BEA), the PCE Price Index edged higher to 2.4% on a yearly basis in November from 2.3% in the previous month.
The core gauge, which excludes volatile food and energy prices, rose 2.8% during the reported period, matching October's reading but arriving below the market expectation of 2.9%.
Additional details of the report revealed that Personal Income grew 0.3% in November, which marked a sharp deceleration relative to the outsized 0.7% increase recorded in October.
Meanwhile, Consumer Spending, which accounts for more than two-thirds of US economic activity, climbed 0.4% last month after a downwardly revised reading of 0.3% in October.
Investors now look forward to the release of the Conference Board's US Consumer Confidence Index for short-term trading opportunities on the first day of a holiday-shortened week.

USD/JPY needs to move back above 157.00 for bulls to retain control

From a technical perspective, Friday's low, around the 156.00-155.95 area, now seems to protect the immediate downside. Any further decline might be seen as a buying opportunity near the 155.50 horizontal zone. This next relevant support is pegged near the 155.00 psychological mark, which if broken decisively, might shift the near-term bias in favor of bearish traders and make the USD/JPY pair vulnerable to weaken further.

On the other end, the 157.00 round figure now seems to act as an immediate hurdle ahead of the 157.40-157.45 region and the multi-month peak, around the 157.90 area touched on Friday. Some follow-through buying beyond the 158.00 mark will be seen as a fresh trigger for bullish traders amid positive oscillators on the daily chart. The USD/JPY pair might then climb to the 158.45 intermediate hurdle before aiming to reclaim the 159.00 mark.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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