The Japanese Yen (JPY) extends its weakening trend on Tuesday and hits a fresh 34-year low against its American counterpart during the early European session amid the Bank of Japan’s (BoJ) dovish outlook. In fact, the Japanese central bank stopped short of offering any guidance about future policy steps, or the pace of policy normalization after ending negative interest rates in March. Moreover, a report on Monday suggested that the Bank of Japan (BoJ) will place less emphasis on inflation and shift to a more discretionary approach that lets various data guide the future rate hike path. This, in turn, is seen as a key factor that continues to undermine the JPY, which, along with some follow-through US Dollar (USD) buying, lifts the USD/JPY pair to levels just above mid-154.00s.
The incoming US macro data pointed to sticky inflation and a still-resilient economy, forcing investors to push back their expectations for the first interest rate cut by the Federal Reserve (Fed) to September from June. This suggests that the large difference in rates between the US and Japan will stay for some time, which might continue to drive flows away from the JPY and support prospects for a further near-term appreciating move for the USD/JPY pair. The JPY bears, however, remain on alert and might refrain from placing fresh bets amid the recent warnings by Japanese authorities that they will intervene in the market to prop up the domestic currency. Apart from this, the worsening Middle East crisis should limit losses for the safe-haven JPY and cap the currency pair.
From a technical perspective, the recent breakout through a short-term trading range hurdle near the 152.00 round figure and the subsequent move up was seen as a fresh trigger for bullish traders. That said, the Relative Strength Index (RSI) on the daily chart is flashing overbought conditions, making it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains. Meanwhile, any meaningful corrective slide below the 154.00 mark is likely to attract fresh buyers and remain limited near the 153.40-153.35 region.
This is followed by the overnight swing low or levels just below the 153.00 mark. Some follow-through selling could pave the way for deeper losses and drag the USD/JPY pair further toward the 152.60-152.55 zone en route to the 152.00 resistance-turned-support. On the flip side, momentum beyond the mid-154.00s has the potential to lift spot prices further towards the 155.00 psychological mark.
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.