- The Japanese Yen continues to draw support from bets for more BoJ rate hikes.
- The narrowing US-Japan rate differential further benefits the lower-yielding JPY.
- Expectations that the Fed will resume its rate-cutting cycle undermine the USD.
The Japanese Yen (JPY) sticks to its positive bias against a broadly weaker US Dollar (USD) through the early European session on Monday amid hawkish Bank of Japan (BoJ) expectations. Traders seem convinced that the BoJ will hike interest rates again and the bets were reaffirmed by data released earlier today, which showed that real cash earnings fell 1.8% on the back of persistent inflation. Adding to this, growing confidence that bumper wage hikes seen last year will continue this year backs the case for further policy tightening by the BoJ, which continues to push Japanese government bond (JGB) yields higher. The resultant narrowing of the rate differential in Japan and other countries benefits the lower-yielding JPY.
Apart from this, persistent worries about the potential economic fallout from US President Donald Trump’s trade policies and a global trade war further underpin the JPY’s relative safe-haven status. The USD, on the other hand, languishes near its lowest level since November in the wake of Friday’s weaker US jobs report, which lifted bets that the Federal Reserve (Fed) will cut interest rates multiple times this year. This further contributes to the offered tone surrounding the USD/JPY pair in the absence of any relevant market-moving economic releases. Moreover, the fundamental backdrop seems tilted firmly in favor of the JPY bulls and suggests that the path of least resistance for the currency pair remains to the downside.
Japanese Yen remains on the front foot against USD amid divergent BoJ-Fed expectations
- Japan’s labor ministry reported Monday that Base pay rose by 3.1% in January from a year earlier – representing the largest advance since October 1992. Additional details revealed that growth in nominal wages slowed from 4.4% in December to 2.8% – marking the lowest reading in three months.
- Meanwhile, real cash earnings ended two straight months of gains and fell 1.8% in January, reflecting the impact of persistent inflation. This, along with expectations that another substantial pay hike in Japan will fuel demand-driven inflation, should allow the Bank of Japan to hike interest rates further.
- Japan’s UA Zensen – a labour union group representing retail, restaurant, and other industry unions – said that its member unions are seeking an average wage hike of 6.11% for their full-time employees in the 2025 wage negotiations. For part-time workers, wage increases asked for averaged at 7.16%.
- The yield on the benchmark 10-year Japanese government bond rose to its highest level since June 2009 and provided a fresh lift to the Japanese Yen during the Asian session on Monday. Apart from this, the prevalent US Dollar selling bias drags the USD/JPY pair back closer to the 147.00 round figure.
- The USD languishes near a multi-month low touched in reaction to weaker US employment details on Friday, which suggested that the labor market in the world’s largest economy slowed in February. The headline Nonfarm Payrolls showed that the economy added 151K jobs in February vs. the 160K forecast.
- Adding to this, the previous month’s reading was revised down to 125K from 143K reported originally. This was accompanied by an unexpected uptick in the Unemployment Rate to 4.1% and overshadowed by a rise in the Average Hourly Earnings to 4% from 3.9% in January (revised from 4.1%).
- This comes amid worries that the uncertainty over US President Donald Trump’s trade policies could slow economic activity in the US and force the Federal Reserve to resume its rate-cutting cycle in June. Moreover, traders are pricing in about three rate cuts of 25 basis points each this year.
- Fed Chair Jerome Powell said on Friday that the US central bank can maintain policy restraint for longer if inflation progress stalls or eases if the labor market unexpectedly weakens or inflation falls more than expected. This, however, does little to lend any support to the USD or the USD/JPY pair.
- Trump took another pivot on his tariff agenda and said that impending tariffs on Canada may or may not come on Monday, or on Tuesday. This comes hours after the Trump administration temporarily waived tariffs on goods that comply with the US–Mexico–Canada Agreement for a month.
- Furthermore, US Commerce Secretary Howard Lutnick said late Sunday that the 25% tariffs on steel and aluminum imports, set to take effect on Wednesday, are unlikely to be postponed. This keeps investors on the edge, underpinning the safe-haven JPY and weighing on the USD/JPY pair.
USD/JPY bears have the upper hand; breakdown below 148.70-148.60 support in play
From a technical perspective, a sustained break and acceptance below the 147.00 mark would be seen as a fresh trigger for the USD/JPY bears and set the stage for an extension of a two-month-old downtrend. That said, the Relative Strength Index (RSI) on the daily chart is on the verge of breaking into oversold territory. Hence, it will be prudent to wait for some near-term consolidation or a modest bounce before positioning for any further depreciation.
Nevertheless, the USD/JPY pair seems vulnerable to weakening further below the 146.50 intermediate support and testing the 146.00 round figure. Some follow-through selling should pave the way for a fall towards the 145.25-145.20 zone en route to the 145.00 psychological mark and the next relevant support near the 144.80-144.75 region.
On the flip side, an attempted recovery might now confront stiff resistance near the 148.00 mark. Any further move up might be seen as a selling opportunity and remain capped near the 148.65-148.70 region. A sustained strength beyond the latter, however, could trigger a short-covering rally and lift the USD/JPY pair above the 149.00 mark, towards the 149.80-149.85 area en route to the 150.00 psychological mark and the 150.35-150.40 supply zone.
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.
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