USD/JPY holds positive ground above 145.00 despite firmer Fed rate cut expectations

USD/JPY gains ground near 145.35 in Wednesday’s early Asian session.
Fed Minutes indicated that the US central bank opened the door for a rate cut in September.
Japan’s Jibun Bank Manufacturing PMI rose to 49.5 in August vs. 49.8 expected; services PMI improved to 54.0 in August.

The USD/JPY pair trades on a stronger note around 145.35 during the early Asian session on Thursday. A record of Japan’s trade deficit data has dragged the Japanese Yen (JPY) lower and supported USD/JPY. On Friday, traders will closely watch Bank of Japan (BoJ) Governor Kazuo Ueda's speech and the Fed Chair Jerome Powell’s speech at Jackson Hole. These events are likely to trigger the volatility in the market.

The minutes of the Federal Reserve’s (Fed) July 30-31 meeting released Wednesday indicated that most Fed officials agreed last month that they would likely cut their benchmark interest rate at the upcoming meeting in September as long as inflation continued to cool. The policymakers kept their benchmark rate at 5.3% in July, which has stood for more than a year. Markets are fully pricing in a September cut, with a full percentage point worth of rate cuts anticipated by the end of this year. The rising expectation of a Fed rate cut might weigh on the Greenback and cap the upside of USD/JPY in the near term.

On the other hand, the majority of the economists expect the BoJ to raise interest rates again by the end of the year. The median forecast for the end-of-year rate is 0.50%, marking a 25 basis points (bps) increase, according to a Reuters poll on Wednesday. Traders will take more cues from BoJ Governor Ueda's appearance in parliament on Friday. If Ueda delivers the hawkish remarks, this might lift the JPY against the USD.

Data released on Thursday by Jibun Bank and S&P Global showed that preliminary Japan’s Manufacturing Purchasing Managers Index (PMI) rose to 49.5 in August from 49.1 in July, but below the market consensus of 49.8. Meanwhile, the Services PMI improved to 54.0 in August versus 53.7 prior.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

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