USD/JPY trades sideways above 147.00 as global recession fears ebb

USD/JPY trades back and forth above 147.00 as investors look for fresh guidance on Fed’s rate-cut path.
Market speculation for Fed rate cuts in September appears as imminent.
The BoJ acknowledged the need to hike interest rates further this year.

The USD/JPY pair trades in a tight range above 147.00 in Friday’s European session. The asset consolidates as investors look for fresh cues about how much the Federal Reserve (Fed) will cut interest rates this year.

The Fed seems certain that it will start reducing its key borrowing rates from the September. While investors are divided whether the rate-cut size will be quarter or half to a percent.

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 56.5% chance that interest rates will be reduced by 50 bps in September, which has come down from 74% recorded a week ago.

Market speculation for Fed reducing rates by 50 bps eased slightly as fears of a global slowdown have diminished after the release of the lower-than-expected United States (US) Initial Jobless Claims. The data indicated that labor market conditions have not slowed to great extent as the Nonfarm Payrolls (NFP) report for July exhibited.

A decline in Fed 50 bps rate-cut prospects has offered some relief to the US Dollar (USD). The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, edges lower in Friday’s European trading hours but holds its recovery above 103.00.

Meanwhile, the Japanese Yen’s outlook remains firm on expectations that the Bank of Japan (BoJ) could raise interest rates further this year. On Thursday, Bank of Japan’s (BoJ) Summary of Opinions (SoP) indicated that officials acknowledged the need of more rate hikes, in the July 30-31 meeting, to tame inflationary pressures, driven by higher import prices.

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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