Japanese Yen remains pinned near multi-decade low against USD
- The Japanese Yen remains on the defensive amid the BoJ’s uncertain policy outlook.
- A positive risk tone also undermines the JPY, though intervention fears limit losses.
- Reduced Fed rate cut bets act as a tailwind for the USD and lend support to USD/JPY.
- Traders now seem reluctant ahead of this week’s key central bank event and data risks.
The Japanese Yen (JPY) kicks off the new week on a subdued note and remains pinned near a multi-decade trough against its American counterpart during the Asian session. The uncertainty over the Bank of Japan's (BoJ) further policy tightening and easing fears about a further escalation of geopolitical tensions in the Middle East turned out to be key factors undermining the JPY. That said, the BoJ Governor Kazuo Ueda's hawkish rhetoric and fresh warnings by Japanese Finance Minister Shunichi Suzuki against excessive currency market moves help limit deeper JPY losses.
Traders also seem reluctant to place fresh directional bets ahead of the crucial BoJ policy decision on Friday. Investors this week will also confront the release of important US macro data – the Advance Q1 GDP on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday. In the meantime, investors have been pushing back their expectations about the timing of the first rate cut by the Federal Reserve (Fed) to September and downsizing bets for the number of rate cuts this year. This acts as a tailwind for the US Dollar (USD) and the USD/JPY pair.
Daily Digest Market Movers: Japanese Yen continues to be undermined by the divergent BoJ-Fed policy expectations
- Data released on Friday showed that Japan’s consumer inflation eased more than expected in March, raising uncertainty about whether the Bank of Japan will raise rates again and weighing on the Japanese Yen.
- Iran signaled that it has no plans to retaliate against the Israeli limited-scale missiles strike on Friday, which helps improve investors' appetite for riskier assets and further dents the JPY’s relative safe-haven status.
- BoJ Governor Kazuo Ueda said on Friday that the central bank might consider raising interest rates again if significant declines in the Yen substantially boost inflation, lending support to the domestic currency.
- Japan's Finance Minister Shunichi Suzuki issued fresh warnings to speculators about pushing down the JPY too much and reiterated that he would take appropriate action against excessive currency market moves.
- According to Fed funds futures, the Federal Reserve is now anticipated to cut interest rates by roughly 40 basis points (bps), or less than two cuts this year starting September in the wake of sticky US inflation.
- This suggests that the large rate differential between the US and Japan will stay, which should act as a headwind for the JPY and lend support to the USD/JPY pair ahead of the crucial BoJ monetary policy decision.
- Markets predict no policy change following last month’s historic decision to end the negative rate policy and Yield Curve Control (YCC) program, suggesting that the focus will remain on the quarterly outlook report.
- From the US, the Advance Q1 GDP print and the Personal Consumption Expenditures (PCE) Price Index are due for release on Thursday and Friday, respectively, which should influence the US Dollar price dynamics.
Technical Analysis: USD/JPY consolidates near multi-decade high amid slightly overbought RSI, bullish potential seems intact
From a technical perspective, the range-bound price action witnessed over the past week or so might still be categorized as a bullish consolidation phase against the backdrop of the recent rally from the March low. That said, oscillators on the daily chart are flashing overbought conditions and capping the upside for the USD/JPY pair. Nevertheless, the setup suggests that the path of least resistance for spot prices is to the upside, and any meaningful corrective pullback might still be seen as a buying opportunity near the 154.30 area. This should help limit the downside near the 154.00 mark, which, if broken, might expose Friday's swing low, around the 153.60-153.55 region. Some follow-through selling has the potential to drag the pair further towards the 153.30-153.25 intermediate support en route to the 153.00 round figure.
On the flip side, the multi-decade high, around the 154.75-154.80 region touched last week, could act as an immediate hurdle ahead of the 155.00 psychological mark. A sustained strength beyond the latter will confirm a fresh breakout through the short-term trading range and set the stage for an extension of a well-established appreciating trend.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.