USD/JPY remains on the defensive below 141.00 as bets firm on jumbo Fed rate cut

USD/JPY rebounds to near 140.80 in Tuesday’s early Asian session.
The US Fed is widely expected to cut interest rates at the conclusion of its meeting on Wednesday.
Analysts see no change in rates at the BoJ meeting on Friday.

The USD/JPY pair recovers some lost ground near 140.80, snapping the five-day losing streak during the early Asian session on Tuesday. However, the upside of the pair might be limited amid the growing expectation that the US Federal Reserve (Fed) will start its easing cycle at the September meeting. Later this week, the US Fed and the Bank of Japan (BoJ) monetary policy meeting will be in the spotlight.

The US Dollar (USD) remains under pressure as Fed easing expectations intensify. Fed Chair Jerome Powel signaled at the Kansas City Fed’s annual economic symposium in Jackson Hole last month that inflation had come under control just enough for the Fed to finally feel comfortable dialing back policy. Powell added that the job market’s fragile health is a key reason why the Fed is poised to act.

The market ramps up expectations for a jumbo 50 basis points (bps) cut at the September Fed meeting on Wednesday, with nearly 67% odds pricing in, up from 50% last Friday. Ahead of the key interest rate decision from both the US and Japan, the US Census Bureau will release the Retail Sales report on Tuesday. The figure is estimated to increase by 0.2% MoM in August versus 1.0% prior.

On the other hand, the BoJ is not expected to raise interest rates on Friday, but a majority of economists polled by Reuters expect a hike by year-end. Richard Kaye, a portfolio manager for Japan equities at Comgest, noted "The main determinant of the yen is the rate or yield gap with the U.S., and the main actor in that is the Fed, and the Fed seems ready to cut."

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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