- The Japanese Yen remains on the defensive against the buck in the wake of the BoJ rate uncertainty.
- The USD stands tall near a two-month top amid bets for a less aggressive policy easing by the Fed.
- The divergent BoJ-Fed policy expectations might cap any meaningful upside for the USD/JPY pair.
The Japanese Yen (JPY) extends its sideways consolidative price move against its American counterpart and languishes near its lowest level since early August touched against through the early European session on Monday. Japanese Prime Minister Shigeru Ishiba’s blunt comments last week on monetary policy dampened expectations for further interest rate hikes by the Bank of Japan (BoJ). This, along with a generally positive risk tone, continues to undermine demand for the safe-haven JPY.
Meanwhile, the US Dollar (USD) stands firm near a two-month high touched last week amid expectations for a less aggressive policy easing by the Federal Reserve (Fed) and turn out to be another factor acting as a tailwind for the USD/JPY pair. The Fed, however, is expected to lower borrowing costs by 25 basis points in November. In contrast, the BoJ is more likely to stick to its rate-hiking cycle. This, in turn, is holding back traders from placing fresh bullish bets around the currency pair.
Daily Digest Market Movers: Japanese Yen traders seem non committed amid mixed fundamental cues
- The futures market implies a less than 50% chance that the Bank of Japan will hike interest rates by 10 basis points before the end of this year in the wake of Japanese Prime Minister Shigeru Ishiba’s dovish turn earlier this October.
- Moreover, a drop in Japan’s real wages for the first time in three months, declining household spending and signs that price pressures from raw material costs were subsiding cast doubts over how aggressively the BoJ could raise rates.
- China’s finance ministry hinted at more debt issuance amid efforts to shore up the domestic economy and said that the central government has room for a deficit increase, though fell short of providing specific details of the stimulus.
- Investors, however, seem optimistic that comprehensive measures will be introduced to stabilize key sectors of the economy and further took cues from the recent rally in the US equity indices, which touched record highs on Friday.
- The US Bureau of Labor Statistics reported that the headline Producer Price Index (PPI) for final demand rose 1.8% and the core gauge climbed 2.8% on a yearly basis in September, both coming in slightly above market expectations.
- This comes on top of last Thursday’s hotter-than-expected US consumer inflation figures and closes the door for another jumbo rate cut by the Federal Reserve in November, pushing the US Dollar back closer to a two-month top.
- That said, the US central bank is still expected to continue lowering interest rates amid signs of labor market weakness and the BoJ is anticipated to hike rates again by the year-end, which caps the upside for the USD/JPY pair.
Technical Outlook: USD/JPY bulls not ready to give up, positive bias remains while above the 148.00 mark
From a technical perspective, the recent breakout through the 50-day Simple Moving Average (SMA) barrier – for the first time since mid-July – and acceptance above the 38.2% Fibonacci retracement level of the July-September downfall favors bulls. This, along with positive oscillators on the daily chart, suggests that the path of least resistance for the USD/JPY pair remains to the upside. Some follow-through buying beyond last week’s swing high, around the 149.55-149.60 region, will reaffirm the positive bias and lift spot prices to the 150.00 psychological mark. The momentum could extend further towards the 50% Fibo. level, around the 150.75-150.80 region.
On the flip side, any meaningful slide below the 149.00 round figure could be seen as a buying opportunity near the 148.55 region. This should help limit the downside for the USD/JPY pair near the 148.00 mark. The latter is likely to act as a key pivotal point, which if broken decisively might prompt some technical selling and drag spot prices to the 147.35 intermediate support en route to the 147.00 mark and the 146.50 area.
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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