Japanese Yen remains on the defensive amid bullish USD, lacks follow-through

The Japanese Yen struggles to gain any meaningful traction amid mixed cues.
The BoJ rate-hike uncertainty and disappointing domestic data weigh on the JPY.
Smaller Fed rate cut bets underpin the USD and offer some support to USD/JPY.

The Japanese Yen (JPY) struggles to capitalize on the previous day's modest recovery, from its lowest level since early August and remains on the defensive against its American counterpart through the early European session on Wednesday. Traders remain uncertain about the Bank of Japan's (BoJ) rate-hike plans, which, in turn, is seen as a key factor acting as a headwind for the JPY. Furthermore, the disappointing release of Japan's Core Machinery Orders for August undermines the JPY.

The US Dollar (USD), on the other hand, climbs to a fresh high in over two months amid 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. This further offers support to the USD/JPY pair. That said, a turnaround in the global risk sentiment – as depicted by a weaker tone around the equity markets – helps limit losses for the safe-haven JPY amid persistent geopolitical risks and caps the currency pair.

Daily Digest Market Movers: Japanese Yen traders seem non-committed amid mixed fundamental cues

The Japanese Yen struggles to capitalize on the previous day's recovery against the US Dollar, from its lowest level since early August, amid doubts over when the Bank of Japan would raise interest rates again.
A significant dovish shift in rhetoric from the BoJ Governor Kazuo Ueda and a surprising opposition to further rate hikes from Japan's Prime Minister Shigeru Ishiba fueled uncertainty around the monetary policy.
Government data showed this Wednesday that Japan's Core Machinery Orders fell for the second straight month, by 1.9% in August, missing estimates by a big margin and signaling deterioration in demand.
Given that manufacturing represents about 15% of Japan’s workforce, weaker orders may affect the labor market, resulting in slower wage growth, reduced consumer spending and complicating BoJ's rate-hike plans.
Japan's upcoming stimulus package will be bigger than last year's measures that were financed with a 13 trillion yen ($87 billion) extra budget, a government spokesperson said on Wednesday.
The US Dollar consolidates near its highest level since August 8 amid firming expectations for a less aggressive policy easing by the Federal Reserve and bets for a regular 25 basis points interest rate cut in November.
San Francisco Fed President Mary Daly noted on Tuesday that the US central bank has made significant progress on tamping down inflation and sees one or two more rate cuts this year if economic forecasts are met.
Atlanta Fed President Raphael Bostic said that he doesn't see strong signs of a potential recession looming over the horizon as the US economy continues to perform well and that the inflation is heading back to 2%.
The Biden administration has warned Israel that it faces possible punishment, including the potential stopping of US weapons transfers if it does not take immediate action to let more humanitarian aid into Gaza.

Technical Outlook: USD/JPY consolidates before the next leg up beyond the 150.00 psychological mark

From a technical perspective, any further decline is likely to find decent support near the 148.60-148.55 region. Some follow-through selling, however, could make the USD/JPY pair vulnerable to weaken further below the 148.00 round figure and test last week's swing low, around the 147.35 area. The latter is followed by the 147.00 mark, which if broken decisively will suggest that the recent move-up witnessed over the past month or so has run its course and pave the way for deeper losses.

On the flip side, the 150.00 psychological mark seems to act as an immediate strong barrier, above which the USD/JPY pair could accelerate the positive move towards the August monthly swing high, around the 150.85-150.90 region. Some follow-through buying beyond the 151.00 mark will be seen as a fresh trigger for bullish traders and lift spot prices to the 152.00 neighborhood en route to the 152.65-152.70 region.

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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