Japanese Yen remains on the front foot against a softer USD; lacks bullish conviction
|- The Japanese Yen struggles to capitalize on the modest bullish gap opening on Monday.
- The outcome of Japan’s upper house election and trade uncertainties undermine the JPY.
- Diminishing odds for an immediate BoJ rate hike contribute to the JPY intraday pullback.
The Japanese Yen (JPY) struggles to capitalize on its modest recovery against a softer US Dollar (USD), assisting the USD/JPY pair to climb back above the 148.00 mark during the first half of the European session on Monday. Japan's upper house election on Sunday dealt a big blow to the ruling coalition and raised concerns about an increase in debt, amid calls from the opposition to boost spending and cut taxes. The outcome could further complicate trade negotiations with the US amid the looming tariff deadline on August 1. Apart from this, the slowing economic growth, declining real wages, and signs of cooling inflation could allow the Bank of Japan (BoJ) to forgo raising interest rates in the near term, which, in turn, acts as a headwind for the JPY.
Meanwhile, Investors remain on edge amid worries about the potential economic fallout from US President Donald Trump's erratic trade policies, which, in turn, offer some support to the safe-haven JPY. The USD, on the other hand, remains depressed below the monthly peak touched last week amid mixed signals about the Federal Reserve's (Fed) rate-cut path. This contributes to capping the USD/JPY pair and warrants some caution for aggressive traders in the absence of any relevant market-moving economic releases on Monday. Nevertheless, the aforementioned fundamental backdrop seems tilted in favor of the JPY bears, suggesting that any corrective slide in the currency pair could be seen as a buying opportunity and remain cushioned.
Japanese Yen bulls seem non-committed amid mixed fundamental cues
- Japan's ruling coalition – the Liberal Democratic Party (LDP) and its junior partner Komeito – failed to secure a majority in the country's upper house in the tightly-contested election on Sunday. Having already lost its majority in Japan's more powerful lower house last October, the defeat will undermine the coalition's influence.
- This raises the risk of policy paralysis amid a tricky time when Japan is struggling to strike a trade deal with the US ahead of the August 1 deadline for US President Donald Trump's reciprocal tariffs. Japan faces a punishing 25% levy on all exports to the US amid stalled negotiations over the latter's protection of its rice market.
- Moreover, history suggests that domestic political uncertainty tends to keep the Bank of Japan on the sidelines. Hence, the prospect of rate hikes is now set to be delayed for a little bit longer, at least until the end of October. This, in turn, undermines the Japanese Yen and assists the USD/JPY pair to attract some dip-buying.
- The US Dollar remains on the back foot below the monthly peak in the wake of Federal Reserve Governor Christopher Waller's dovish comments last week, backing the case for a rate cut in July. Investors, however, seem convinced that the US central bank will keep rates elevated for a longer period amid inflationary concerns.
- The latest US inflation figures released last week indicated that the Trump administration's increasing import taxes are passing through to consumer prices. Traders seem convinced that the Fed will wait at least until September before pulling the trigger and are pricing in the possibility of a 50 basis points rate cut by the year-end.
- Japanese markets are closed on Monday in observance of Marine Day. Moreover, there isn't any relevant market-moving data due for release from the US, leaving the USD/JPY pair at the mercy of the USD price dynamics. Later this week, traders will take cues from the flash global PMIs, which could influence the safe-haven JPY.
USD/JPY struggles to find bearish acceptance below the 148.00 mark
From a technical perspective, the USD/JPY pair once again showed some resilience below the 100-hour Exponential Moving Average (EMA). However, the recent failure to find acceptance above the 149.00 mark warrants some caution for bulls. Hence, it will be prudent to wait for some follow-through buying beyond the 149.15-149.20 region, or a multi-month peak, before positioning for any further gains. Given that oscillators on the daily chart are holding comfortably in positive territory, spot prices might then aim to reclaim the 150.00 psychological mark.
On the flip side, any corrective pullback might continue to find some support near the 148.00 mark, or the Asian session low. This is followed by the 147.70-147.65 area, or the 100-hour SMA, which, if broken, could drag the USD/JPY pair to sub-147.00 levels. Acceptance below the latter might shift the bias in favor of bearish trades and pave the way for a fall towards the 146.60 intermediate support en route to the 146.20 area, the 146.00 mark, and the 100-day SMA, currently pegged near the 145.80 region.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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