- The Japanese Yen dropped to a two-month low against the USD amid the BoJ rate-hike uncertainty.
- Rising bets for a regular 25 bps Fed rate cut move in November offer support to the USD and USD/JPY.
- The JPY bulls seem unimpressed by Japan’s PPI print as the focus remains glued to the US CPI report.
The Japanese Yen (JPY) oscillates in a range during the Asian session on Thursday and consolidates the recent losses against its American counterpart, to the lowest level since mid-August touched the previous day. Data published earlier this Thursday showed that the Producer Price Index (PPI) in Japan remained unchanged in September and the yearly rate rose more than anticipated during the reported month. This, along with the risk of a further escalation of tensions in the Middle East, offers some support to the safe-haven JPY.
Meanwhile, the US Dollar (USD) enters a bullish consolidation phase near an eight-week high as traders move to the sidelines ahead of the release of the US consumer inflation figures later this Thursday. This contributes to capping the upside for the USD/JPY pair. That said, the uncertainty over the Bank of Japan’s (BoJ) plans for additional interest rate hikes might keep a lid on the JPY. Furthermore, bets for a regular 25 basis points (bps) rate cut by the Federal Reserve (Fed) should act as a tailwind for the Greenback and the currency pair.
Daily Digest Market Movers: Japanese Yen struggles to lure buyers amid BoJ rate uncertainty, ahead of US CPI report
- Data published on Tuesday showed that Japan’s real wages fell in August after two months of gains and a decline in household spending, raising doubts about the strength of private consumption and a sustained economic recovery.
- This comes on top of blunt comments on monetary policy by Japan’s Prime Minister Shigeru Ishiba and fuels uncertainty over the Bank of Japan’s rate hike plans, which weighed on the Japanese Yen and pushed the USD/JPY pair higher.
- The US Dollar shot to its highest level since August 16 after minutes from the September FOMC meeting revealed that a majority supported the 50 basis point rate cut as the committee was confident of inflation moving toward the 2% goal.
- Some participants, however, indicated that they would have preferred only a 25 bps rate reduction, citing that inflation was still somewhat elevated while economic growth remained solid and unemployment remained low.
- Furthermore, there was a broader agreement that the outsized rate cut would not lock the Federal Reserve into any specific pace for future interest rate cuts and should not be seen as a sign of a more negative economic outlook.
- Dallas Fed President Lorie Logan argued on Wednesday that she favored smaller reductions going forward as there were still real upside risks to inflation and pointed to meaningful uncertainties surrounding the economic outlook.
- Separately, Boston Fed President Susan Collins stressed that policy is not on a pre-set path and will remain carefully data-dependent and added that it will be important to preserve the currently healthy labor market conditions.
- Furthermore, San Francisco Fed President Mary Daly said that the size of the September rate cut does not say anything about the size of the next cuts and that one or two more rate cuts this year are likely if the economy evolves as she expects.
- According to the CME Group’s FedWatch Tool, market participants are now pricing in a greater chance that the Fed will lower borrowing costs by 25 bps in November and over a 20% probability that it will keep interest rates on hold.
- The yield on the rate-sensitive two-year US government bond rose to its highest yield since August 19, while the benchmark 10-year Treasury yield climbed for the sixth straight day on Wednesday, to its highest level since July 31.
- A BoJ report showed on Thursday that the Producer Price Index (PPI) in Japan remained unchanged in September against a 0.3% decline anticipated, while the yearly rate unexpectedly inched up from 2.6% in August to 2.8%.
- Investors now await the US Consumer Price Index (CPI), due later today, which, along with the US Producer Price Index on Friday, might influence market expectations about the Fed’s rate-cut path and drive the USD/JPY pair.
Technical Outlook: USD/JPY bulls have the upper hand while above 38.2% Fibo. breakpoint, around 148.70-148.65 region
From a technical perspective, the overnight sustained close above the 38.2% Fibonacci retracement level of the July-September downfall and the 149.00 mark could be seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart have been gaining positive traction and are away from being in the overbought territory, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Hence, a further appreciation towards the 150.00 psychological mark en route to the 50% retracement level, around the 150.75-150.80 region, looks like a distinct possibility.
On the flip side, any meaningful slide below the 149.00 mark now seems to attract some buyers near the 148.70-148.65 region. This, in turn, should help limit the downside for the USD/JPY pair near the 148.00 round figure. The latter should act as a key pivotal point, which if broken 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.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
Read the full article here
