Japanese Yen slumps to fresh three-month low against the bullish USD

The Japanese Yen remains under heavy selling pressure amid the BoJ rate-hike uncertainty.
The recent intervention warnings and the risk-off mood do little to lend support to the JPY.
An extension of the recent USD rally pushes the USD/JPY pair to a nearly three-month high.

The Japanese Yen (JPY) continues with its relative underperformance on Wednesday amid the uncertainty over the timing and pace of further rate hikes by the Bank of Japan (BoJ). Bulls seem rather unaffected by the recent verbal intervention by Japanese authorities and a generally weaker risk tone, which tends to benefit the safe-haven JPY. Apart from this, sustained US Dollar (USD) buying interest pushes the USD/JPY pair to the 152.35 region, or the highest level since July 31 heading into the European session.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to its highest level since early August amid bets for a less aggressive policy easing by the Federal Reserve (Fed). This, along with deficit-spending concerns after the November 5 US Presidential election, remains supportive of the ongoing rise in the US Treasury bond yields, to their highest levels in almost three months. This supports prospects for further depreciation for the lower-yielding JPY and additional gains for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen bears remain in control amid BoJ uncertainty, sustained USD buying

The Japanese Yen touched the weakest level in almost three months against its American counterpart amid doubts over the Bank of Japan's rate-hike plans.
The JPY bears seem unaffected by the recent verbal interventions by Japanese authorities, following a slide below the key 150.00 psychological mark.
The prospects of slower rate cuts by the Federal Reserve and bigger fiscal deficits after the US Presidential election led to a selloff in the bond market.
The yield on the benchmark 10-year US government bond rises to levels last seen in July and lifts the US Dollar to its highest level since early August.
San Francisco Fed President Mary Daly noted that the economy is in a better place, inflation has fallen and the labor market has returned to a more sustainable path.
Odds have swung in favor of former President Donald Trump winning the US election next month, fueling speculations about inflation-generating tariffs.
As markets look for the impending strike by Israel against Iran, Hezbollah fired rockets at two bases near Tel Aviv and a naval base west of Haifa on Tuesday.
Diplomatic efforts, so far, have failed to bring an end to the year-long conflict in the Middle East, tempering investors' appetite for perceived riskier assets.
Traders now look to the release of the US Existing Home Sales for some impetus, though the focus remains on BoJ Governor Kazuo Ueda's speech at IMF-hosted "Governors Talk"
The attention will then shift to the Tokyo consumer inflation on Friday, which will influence the JPY ahead of Japan's general election on October 27 and the BoJ meeting on October 31.

Technical Outlook: USD/JPY seems poised to extend its upward momentum while above the 152.00 mark

From a technical perspective, the overnight breakout above the 100-day Simple Moving Average (SMA) was seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart are holding comfortably in positive territory and support prospects for additional gains towards the 152.00 mark. Some follow-through buying should pave the way for an extension of the recent well-established uptrend witnessed over the past month or so.

That said, the Relative Strength Index (RSI) on the daily chart has moved on the verge of breaking into overbought territory and warrants some caution for aggressive bullish traders. Hence, it will be prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciation.

On the flip side, any meaningful corrective slide now seems to find some support near the 151.20-151.15 region ahead of the 151.00 mark. A further decline could be seen as a buying opportunity, which, in turn, should help limit the downside for the USD/JPY pair near the 150.60 area. The latter should act as a key pivotal point, below which spot prices could accelerate the fall towards the 150.00 psychological 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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