- The Japanese Yen continues to be undermined by wavering BoJ rate hike expectations.
- The au Jibun Bank Japan Services PMI was revised down to 50.9 from 51.4 for December.
- The USD stands near a two-year top amid the Fed’s hawkish shift and supports USD/JPY.
The Japanese Yen (JPY) continues losing ground against its American counterpart, pushing the USD/JPY pair back closer to the multi-month peak touched in December. Doubts over when the Bank of Japan (BoJ) will hike interest rates again along with the prevalent risk-on mood, turn out to be key factors undermining the safe-haven JPY. Apart from this, the recent widening of the US-Japan yield differential, bolstered by the Federal Reserve’s (Fed) hawkish signal, contributes to driving flows away from the lower-yielding JPY.
Meanwhile, data released earlier this Monday showed that the business activity in Japan’s service sector expanded for the second straight month in December. This comes on top of a pick-up in Japan’s service-sector inflation and backs the case for a January BoJ rate hike. Apart from this, geopolitical risks and concerns about Trump’s tariff plans hold back the JPY bears from placing aggressive bets. Furthermore, a modest US Dollar (USD) pullback from a two-year peak might cap the upside for the USD/JPY pair.
Japanese Yen struggles to lure buyers amid BoJ rate hike uncertainty
- The Bank of Japan last month offered few clues on how soon it could push up borrowing costs again, while stressing the need to be more cautious amid domestic and global uncertainties.
- The au Jibun Bank Service Purchasing Managers’ Index (PMI) was revised down to 50.9 for December, from the flash reading of 51.4, still marked expansion for the second straight month.
- The survey further revealed that the subindex of new business rose for a sixth straight month, employment grew for the 15th consecutive month and business sentiment stayed positive.
- BoJ Governor Kazuo Ueda hopes that wages and prices increase at a balanced pace this year and said that the timing of adjusting monetary support depends on economic, price and financial developments.
- Markets expect that the BoJ will raise rates to 0.50% by the end of March from 0.25%. The next BoJ meeting is scheduled on January 23-24 followed by another meeting on March 18-19.
- The Institute of Supply Management (ISM) reported on Friday that the US Manufacturing PMI improved from 48.4 to 49.3 in December, pointing to signs of resilience and potential for growth.
- The Federal Reserve signaled in December that it would slow the pace of interest rate cuts in 2025, which has been pushing the US Treasury bond yields and the US Dollar higher in recent weeks.
- San Francisco Fed President Mary Daly said on Saturday that despite significant progress in lowering price pressures over the past two years, inflation remains uncomfortably above the 2% target.
- Traders now look to the US economic docket – featuring the release of the final Services PMI and Factor Orders data – for some impetus and short-term trading opportunities later today.
- Investors this week will confront other important US macro data – ISM Services PMI, JOLTS Job Openings, the ADP report on private-sector employment and the Nonfarm Payrolls (NFP) report.
USD/JPY could accelerate the positive move once 158.00 barrier is cleared
Any subsequent move-up is likely to face some resistance around the 158.00 neighbourhood, or the multi-month peak. A sustained move beyond will be seen as a fresh trigger for bullish traders and pave the way for additional gains amid positive oscillators on the daily chart. The USD/JPY pair might then aim to surpass the 158.45 intermediate hurdle and reclaim the 159.00 mark. The momentum could extend further towards the 160.00 psychological mark en route to the 160.50 area, which coincides with the top end of a multi-month-old ascending channel.
On the flip side, the Asian session low, around the 157.00 mark, now seems to protect the immediate downside ahead of the 156.65 horizontal zone and the 156.00 mark. Any further decline could be seen as a buying opportunity near the 155.50 region and help limit losses for the USD/JPY pair near the 155.00 psychological mark. The latter should act as a strong base for spot prices, which if broken decisively might shift the near-term bias in favor of bearish traders.
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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