Japanese Yen struggles for firm near-term direction amid mixed fundamental cues

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  • The Japanese Yen seesaws between tepid gains/minor losses against the USD on Wednesday.
  • The BoJ’s dovish stance undermines the JPY, though intervention fears limit the downside.
  • Reduced bets for a June Fed rate cut should lend support to the Greenback and USD/JPY.

The Japanese Yen (JPY) struggles to capitalize on the previous day’s modest uptick against its American counterpart and remains confined in a familiar range held over the past two weeks or so. Investors remain on alert that Japanese authorities will intervene in the markets to prevent a destabilising fall in the domestic currency. This, along with a softer risk tone, is seen lending some support to the safe-haven JPY, though the Bank of Japan’s (BoJ) cautious approach towards further policy tightening fails to impress bulls or provide any meaningful impetus.

The US Dollar (USD), on the other hand, remains under some selling pressure for the second successive day and contributes to the USD/JPY pair’s subdued price action during the Asian session. Meanwhile, reduced bets for rate cuts by the Federal Reserve (Fed) indicate that the gap between US and Japanese interest rates will stay wide. This might continue to drive flows away from the JPY and suggests that the path of least resistance for the currency pair is to the upside. Traders now look to the US macro data and speeches by Fed officials for short-term opportunities.

Daily Digest Market Movers: Japanese Yen fails to lure buyers despite softer risk tone and intervention fears

  • Japanese Finance Minister Shunichi Suzuki repeated his warning that authorities were ready to take appropriate action against excessive exchange-rate volatility and offered some support to the Japanese Yen.
  • The uncertainty over the Federal Reserve’s plans to cut interest rates, along with persistent geopolitical risks, tempers investors’ appetite for riskier assets and further benefits the JPY’s relative safe-haven status.
  • The Bank of Japan struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future policy steps, or the pace of policy normalization, which caps gains for the JPY.
  • Odds of a June Fed rate cut dip below 50% after data released this week showed that the US manufacturing sector expanded in March for the first time since September 2022 and that demand for labor remains elevated.
  • The US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday that the number of job openings on the last business day of February stood at 8.75 million.
  • A separate report by the Commerce Department’s Census Bureau showed that new orders for US-manufactured goods rebounded more than expected, by 1.4% in February following a 3.8% drop in the previous month.
  • San Francisco Fed President Mary Daly said on Tuesday that inflation is gradually decreasing, though the process is erratic and gradual, and that maintaining the status quo is the appropriate policy at present.
  • Adding to this, Cleveland Fed President Loretta Mester expects the central bank to cut rates later this year, though noted that moving rates down too soon would risk undoing the progress made on inflation.
  • This comes on the back of Fed Chair Jerome Powell’s remarks on Friday, saying that there was no need to be in a hurry to cut interest rates and raised doubts if the central bank will cut rates three times this year.
  • The yield on the benchmark 10-year US government bond advanced to a four-month high, helping the US Dollar to stall the overnight pullback from a multi-month top and acting as a tailwind for the USD/JPY pair.

Technical Analysis: USD/JPY remains confined in a two-week-old range below 152.00, bullish potential seems intact

From a technical perspective, the range-bound price action witnessed over the past two weeks or so might still be categorized as a bullish consolidation phase against the backdrop of a strong rally from the March swing low. Moreover, oscillators on the daily chart are holding in the positive territory and are still far from being in the overbought zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the upside. That said, bulls might need a sustained breakout through the trading range resistance, around the 152.00 mark, or a multi-decade high before positioning for any further appreciating move.

On the flip side, the lower end of the aforementioned trading range, around the 151.10-151.00 area, is likely to protect the immediate downside. Some follow-through selling below the 150.85-150.80 horizontal resistance breakpoint, now turned support, could expose the next relevant support near the 150.25 area. This is closely followed by the 150.00 psychological mark, which if broken decisively might turn the USD/JPY pair vulnerable to accelerate the corrective decline further towards the 149.35-149.30 region before eventually dropping to the 149.00 mark.

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.