- The Japanese Yen continues with its relative outperformance despite political uncertainty.
- The incoming macro data from Japan reaffirmed BoJ rate hike bets and underpinned the JPY.
- Dovish Fed expectations weigh on the USD and also exert pressure on the USD/JPY pair.
The Japanese Yen (JPY) builds on its steady intraday ascent against a broadly weaker US Dollar (USD) and drags the USD/JPY pair to the 147.00 mark during the Asian session on Tuesday. US President Donald Trump signed an executive order last Thursday to lower the Japanese auto import tariff. Adding to this, an upward revision of Japan’s Q2 GDP growth figures, along with a rise in household spending and positive real wages, backs the case for an imminent interest rate hike by the Bank of Japan (BoJ). This, in turn, is seen as a key factor that continues to underpin the JPY.
Meanwhile, the aforementioned supporting factor, to a larger extent, offsets domestic political uncertainty, fueled by Japanese Prime Minister Shigeru Ishiba’s resignation over the weekend, which could temporarily hinder the BoJ from normalising policy. Even the upbeat market mood does little to dent the bullish sentiment surrounding the safe-haven JPY. The USD, on the other hand, has dropped to a fresh low since July 28 amid bets for a more aggressive policy easing by the Federal Reserve (Fed). This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside.
Japanese Yen sticks to bullish bias as BoJ rate hike bets offset political uncertainty
- Japan’s tariff negotiator Ryosei Akazawa said in an X post on Tuesday that US tariffs on Japanese goods, including cars and auto parts, are set to be lowered by September 16. US President Donald Trump’s signing of an executive order last Thursday formalized the U.S.-Japan trade deal and cleared uncertainties.
- The Cabinet Office reported on Monday that Japan’s economy expanded at an annualised 2.2% rate in the April-June period from the previous quarter, much faster than the initial reading of 1.0% growth. On a quarterly basis, GDP increased by 0.5% compared to a median forecast and the initial estimate of a 0.3% rise.
- This comes after data released on Friday showed that real wages in Japan turned positive for the first time in seven months. This, along with a further rise in household spending, keeps hopes alive for an imminent interest rate hike by the Bank of Japan (BoJ) and continues to offer some support to the Japanese Yen.
- Japan’s Prime Minister Shigeru Ishiba announced over the weekend that he will step down as President of the ruling Liberal Democratic Party (LDP). This adds a layer of uncertainty, which could temporarily hinder the BoJ from normalising policy and hold back the JPY bulls from positioning for any meaningful upside.
- Meanwhile, the US Dollar continues with its struggle to attract any meaningful buyers and touches a fresh low since July 28 during the Asian session on Tuesday amid bets for a more aggressive policy easing by the Federal Reserve. In fact, traders are pricing in a small possibility of a jumbo interest rate cut later this month.
- Moreover, the US central bank could lower borrowing costs three times by the year-end. The expectations were boosted by the US employment details released on Friday, which provided further evidence of a softening US labor market. This marks a significant divergence in comparison to hawkish BoJ and favors the JPY bulls.
- The US Bureau of Labor Statistics will publish the preliminary estimate of the annual revision of Nonfarm Payrolls later today, which might drive the USD and the USD/JPY pair. The focus will then shift to the US Producer Price Index (PPI) and the Consumer Price Index (CPI), due on Wednesday and Thursday, respectively.
USD/JPY could accelerate the downfall once 146.80-146.70 support is broken decisively
The overnight failure ahead of the very important 200-day SMA barrier and a subsequent slide below the 148.00 mark favor the USD/JPY bears. Moreover, oscillators on the daily chart have again started gaining negative traction and suggest that the path of least resistance for spot prices is to the downside. Hence, some follow-through selling below the 147.00 mark, leading to a subsequent break through the 146.80-146.70 horizontal support, will reaffirm the negative bias and expose the August swing low, around the 146.20 region, before the pair eventually drops to the 146.00 mark.
On the flip side, the Asian session high, around the 147.50-147.55 area, now seems to act as an immediate hurdle. A sustained strength beyond might trigger a short-covering move and allow the USD/JPY pair to reclaim the 148.00 mark. The momentum could extend further, though it runs the risk of fizzling out rather quickly near the 200-day SMA barrier, around the 148.75 zone. This is closely followed by the 149.00 round figure and the 149.20 area, or a one-month high touched last week, which, if cleared, might shift the near-term bias in favor of bulls. Spot prices might then climb to the 150.00 psychological mark and then aim to challenge the August monthly swing high, around the 151.00 neighborhood.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
