- The Japanese Yen drifts lower for the third straight day amid the BoJ rate hike uncertainty.
- A modest USD rebound contributes to the USD/JPY pair’s positive move to a multi-day high.
- The divergent BoJ-Fed policy expectations might cap the pair ahead of key US macro data.
The Japanese Yen (JPY) extends its steady intraday descent through the Asian session on Tuesday amid the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ). Apart from this, a generally positive tone around the Asian equity markets undermines the safe-haven JPY. This, along with a modest US Dollar (USD) uptick, lifts the USD/JPY pair to a nearly one-week top, around the 147.85 region, and backs the case for additional gains.
Investors, however, seem convinced that the BoJ will stick to its policy normalization path and raise interest rates by the end of this year. In contrast, the Federal Reserve (Fed) is widely expected to lower borrowing costs in September. The divergent BoJ-Fed policy outlook should contribute to limiting losses for the lower-yielding JPY. Moreover, worries about the Fed’s independence might cap the attempted USD recovery and the USD/JPY pair ahead of key US macro data.
Japanese Yen bears retain short-term control amid BoJ rate hike uncertainty, positive risk tone
- Asian stocks posted modest gains at the open on Tuesday amid a surge in China’s CSI 300 Index, which contributes to the safe-haven Japanese Yen’s underperformance against its American counterpart for the third straight day.
- Capital Spending data released from Japan on Monday indicated a pickup in business investments in the second quarter. This could bolster the labour market and demand-driven inflation, reaffirming Bank of Japan rate hike bets.
- In contrast, traders are pricing in a nearly 90% chance that the Federal Reserve will lower borrowing costs by 25 basis points in September, which marks a significant divergence in comparison to hawkish BoJ expectations.
- Moreover, market participants see a greater chance that the US central bank will cut interest rates twice by the end of this year. This, along with concerns about the Fed’s independence, keeps the US Dollar bulls on the defensive.
- US Treasury Secretary Scott Bessent, speaking during a Reuters interview, defended President Donald Trump’s removal of Fed Governor Lisa Cook and argued that allegations of mortgage fraud against her warranted scrutiny.
- Cook, however, refused to step down and has filed a lawsuit. Meanwhile, Cook’s departure would give Trump another appointment to the Fed’s seven-member board and command a majority for the first time in decades.
- Moreover, Trump has repeatedly criticized Fed Chair Jerome Powell for not cutting rates more aggressively. Nevertheless, the development has raised concerns about the central bank’s autonomy and could weigh on the USD.
- A busy week of important US macro releases scheduled at the start of a new month kicks off with the ISM Manufacturing PMI, which might influence the USD price dynamics and influence the USD/JPY pair later this Tuesday.
- Investors will also confront the release of the US JOLTS Job Openings on Wednesday, followed by the ADP report on private-sector employment and ISM Services PMI on Thursday, and the Nonfarm Payrolls (NFP) report on Friday.
USD/JPY might face stiff resistance and struggle to break through trading range hurdle near 148.00
From a technical perspective, the USD/JPY pair’s move up over the past three days validates a support marked by the lower boundary of a four-week-old trading range, around the 146.70 region. The said area should act as a key pivotal point, which, if broken decisively, could drag spot prices to the August swing low, around the 146.20 area, en route to the 146.00 mark. Some follow-through selling will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
On the flip side, any further move up could attract fresh sellers and remain capped ahead of the 148.00 round figure, which represents the top end of the multi-week-old trading band. A sustained strength beyond could prompt a short-covering rally towards the recent swing high, around the 148.75-148.80 region. The latter nears the 200-day Simple Moving Average (SMA). Hence, some follow-through buying might shift the near-term bias in favor of the USD/JPY bulls.
Fed FAQs
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.
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.
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.
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.
