Japanese Yen remains on the defensive against USD, 157.00 holds ...
The Japanese Yen (JPY) remains depressed against its American counterpart through the Asian session on Tuesday and retreats further from a one-week low, around mid-154.00s touched the previous day. Despite a possible intervention by Japanese authorities on Monday, the Bank of Japan's (BoJ) cautious approach towards further policy tightening turns out to be a key factor undermining the JPY. Apart from this, signs of cooling inflation in Tokyo – Japan's capital city – and easing fears of any further escalation of geopolitical tensions in the Middle East exert additional pressure on the safe-haven JPY.
The US Dollar (USD), on the other hand, regains some positive traction and reverses a major part of the overnight slide back closer to a two-week low amid bets that the Federal Reserve (Fed) will keep rates higher for longer amid sticky inflation. This, in turn, provides an additional boost to the USD/JPY pair and remains supportive of the intraday positive move. Moving ahead, traders now look to the US economic docket – featuring the Chicago PMI and the Conference Board's Consumer Confidence Index – to grab short-term opportunities later during the early North American session on Tuesday.
The focus, however, remains glued to the outcome of the crucial two-day FOMC policy meeting, scheduled to be announced on Wednesday. Furthermore, the release of the closely-watched US monthly jobs data, popularly known as the Nonfarm Payrolls (NFP) report on Friday should offer fresh cues about the Fed's rate-cut path. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide some meaningful impetus to the USD/JPY pair. In the meantime, expectations that the US-Japan rate differential will remain wide for some time should cap any meaningful gains for the JPY.
Daily Digest Market Movers: Japanese Yen erodes part of overnight gains inspired by possible government intervention The Japanese Yen witnessed a dramatic intraday turnaround after touching a fresh 34-year low on Monday amid reports that Japanese authorities intervened in the market to support the domestic currency. Japan's top currency diplomat Masato Kanda refrained from confirming if there was an intervention but said that the current developments in the currency market were “speculative, rapid and abnormal”. The strong JPY recovery, however, lost traction in the wake of firming expectations that a significant interest-rate differential between Japan and the United States is likely to remain in place for some time. The Bank of Japan decided to keep its key interest rate unchanged at the end of April policy meeting last Friday and said that it will continue buying government bonds in line with the guidance made in March. The BoJ lowered its economic growth forecast for the current fiscal year 2024, while data on Monday showed that inflation in Tokyo slowed for the second month in April, raising doubts about further policy tightening. The Federal Reserve is expected to keep rates higher for longer, and the bets were reaffirmed by Friday's release of the Personal Consumption Expenditures (PCE) Price Index, which pointed to sticky inflation. Data released from Japan this Tuesday showed that the unemployment rate held steady at 2.6% in March as compared to the 2.5% anticipated, while Industrial Production grew by 3.8% during the reported month. Meanwhile, Japan's Retail Sales declined by 1.2% in March and the yearly rate, though recorded a slower-than-expected rise, pointed to expansion for the 25th consecutive month, doing little to influence the JPY. Traders now look to the US economic docket – featuring the Chicago PMI and the Conference Board's Consumer Confidence Index — for short-term opportunities ahead of the FOMC policy decision on Wednesday. Apart from this, important US macro data scheduled at the beginning of a new month, influencing the monthly jobs data, should influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair. Technical Analysis: USD/JPY could aim to test 50% Fibo. level one the 157.00 mark is taken out decisivelyFrom a technical perspective, spot prices showed resilience below the 200-hour Simple Moving Average (SMA) on Monday. The subsequent move beyond the 38.2% Fibonacci retracement level of the overnight sharp pullback from a multi-decade top favored bullish traders. Moreover, oscillators on hourly charts have again started gaining positive traction and validate the constructive outlook for the USD/JPY pair. Hence, some follow-through strength beyond the 157.00 mark towards the 50% Fibo. level near the 157.40 region looks like a distinct possibility. The momentum could extend further towards the 158.00 round figure or the 61.8% Fibo. level, which should now act as a key pivotal point.
On the flip side, weakness back below the 156.75-156.70 area now seems to find some support near the 156.35 region ahead of the 156.00 mark. A convincing breakthrough the latter might expose the 200-hour SMA support, currently pegged near the 155.35 zone, before the USD/JPY pair weakens further below the 155.00 psychological mark and challenges the overnight swing low, around mid-154.00s.
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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