- The Japanese Yen recovers a bit against the USD, from over a two-month low set on Monday.
- 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 capitalize on a modest Asian session uptick against its American counterpart and hangs near the lowest level since early August touched on Monday. The uncertainty over the Bank of Japan's (BoJ) rate-hike plans, along with the prevalent risk-on environment, turn out to be key factors capping the upside for the safe-haven JPY. Adding to this, a bullish US Dollar (USD) contributes to limiting the downside for the USD/JPY pair.
Traders no longer expect another outsized interest rate cut by the Federal Reserve (Fed) in November, which led to the recent upswing in the US Treasury bond yields. This keeps the USD Index (DXY), which tracks the Greenback against a basket of currencies, well supported near a two-month peak and could undermine the low-yielding JPY. Hence, any meaningful downfall in the USD/JPY pair might be seen as a buying opportunity and is likely to remain limited.
Daily Digest Market Movers: Japanese Yen struggles to lure buyers amid BoJ uncertainty, bullish USD
- 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 could accelerate the positive move once 150.00 psychological mark is conquered
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.
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 embarked in an ultra-loose monetary policy in 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. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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