Japanese Yen pares intraday losses to multi-month low as USD bulls pause for a breather

The Japanese Yen fails to capitalize on the hawkish BoJ minutes-led intraday uptick.
The BoJ rate-hike uncertainty and the risk-on impulse weigh heavily on the JPY.
The US election results trigger a sharp rise in the US bond yields and the USD.

The Japanese Yen (JPY) recovers a part of heavy intraday losses against its American counterpart, dragging the USD/JPY pair to mid-153.00s heading into the European session on Wednesday. The JPY bears turn cautious amid fears that Japanese authorities could intervene in the markets to prop up the domestic currency. Apart from this, the hawkish Bank of Japan (BoJ) meeting minutes, signaling that the central bank will continue to hike interest rates if economic and price forecasts meet, offer some support to the JPY.

Meanwhile, a modest pullback in the US Treasury bond yields prompts some US Dollar (USD) profit-taking following a sharp surge to the highest level since early July and turns out to be another factor that benefits the lower-yielding JPY. That said, bets that Japan's political landscape could make it difficult for the BoJ to hike interest rates further, along with the risk-on impulse, might cap the safe-haven JPY. Furthermore, the odds of a victory for Republican Donald Trump favors the USD bulls and should limit losses for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen might struggle to capitalize on its modest recovery against bullish USD

The minutes of the September Bank of Japan policy meeting showed that the central bank plans gradual policy rate increases, though it remains cautious about overseas economic uncertainties, especially from the US.
This comes on top of BoJ Governor Kazuo Ueda's hawkish remarks last week and keeps the door open for additional rate hikes, which, in turn, provides a modest lift to the Japanese Yen during the Asian session.
The initial market reaction, however, turns out to be short-lived and fades rather quickly amid doubts over the BoJ's ability to tighten its monetary policy further in the wake of the political uncertainty in Japan.
The US Dollar rallies across the board after exit polls indicate an early lead in key swing states for the Republican nominee Donald Trump, triggering a sharp surge of nearly 250 pips for the USD/JPY pair.
Rising odds of Trump winning the election fuel speculations about the launch of potentially inflation-generating tariffs, which, along with deficit-spending concerns, push the US Treasury bond yields sharply higher.
The yield on the benchmark 10-year US government bond spikes to its highest level since July, contributing to the strong bid tone surrounding the USD and driving flows away from the lower-yielding JPY.

Technical Outlook: USD/JPY needs to find acceptance for bulls to regain near-term control and extend the momentum

From a technical perspective, strength beyond the 153.85-153.90 region and the 154.00 mark could be seen as a fresh trigger for bullish traders. Given that oscillators on the daily chart are holding in the positive territory, spot prices might now climb to the next relevant hurdle near the 154.60-154.70 area before aiming to reclaim the 155.00 psychological mark.

On the flip side, the 152.30 area now seems to protect the immediate downside ahead of the 152.00 mark and the Asian session low, around the 151.30-151.25 region. This is followed by the 151.00 round figure, below which the USD/JPY pair could slide towards the 100-day Simple Moving Average (SMA) resistance breakpoint, now turned support, around the 150.25 region. Some follow-through selling, leading to a break below the 150.00 psychological mark, will shift the near-term bias in favor of bearish traders and pave the way for deeper losses.

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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