Japanese Yen recovers from two-week low as BoJ-Fed policy divergence limits losses
- The Japanese Yen drops to a two-week low on Monday, though it lacks follow-through.
- The divergent BoJ-Fed policy outlooks help limit deeper losses for the lower-yielding JPY.
- The USD stalls its recent recovery from a multi-year low and also caps the USD/JPY pair.
The Japanese Yen (JPY) recovers from a two-week low touched against its American counterpart earlier this Monday, though the upside potential seems limited. The growing acceptance that the Bank of Japan (BoJ) will stick to its policy normalization path marks a significant divergence in comparison to the Federal Reserve's (Fed) dovish signal, indicating the need for two more rate cuts by the end of this year. The latter keeps a lid on the recent US Dollar (USD) recovery from a three-and-a-half-year low and acts as a tailwind for the lower-yielding JPY.
Investors, however, seem convinced that domestic political uncertainty and economic headwinds stemming from US tariffs could give the BoJ more reasons to delay raising interest rates. This, along with a positive risk tone, could undermine the safe-haven JPY. This, in turn, warrants some caution before confirming that the USD/JPY pair's recent sharp recovery from the lowest level since July 7 touched last week has run out of steam. Traders now look to speeches from influential FOMC members for a fresh impetus later during the North American session.
Japanese Yen bears turn cautious amid the divergent BoJ-Fed policy expectations
- The Bank of Japan left its Target Rate unchanged at 0.50%, as was expected, for its fifth straight meeting on Friday, though there were two dissenters voting for a rate hike. Investors, however, remain concerned that the BoJ could delay raising interest rates amid domestic political uncertainty and economic headwinds stemming from US tariffs.
- Japan's Chief Cabinet Secretary and Prime Minister contender, Yoshimasa Hayashi, said this Monday that the BoJ is conducting monetary policy in a way that does not deviate much from the government's thinking. If chosen as premier, will compile economic package to cushion blow from rising living costs, spending for disaster relief, Hayashi added.
- The People’s Bank of China (PBOC) kept its benchmark lending rates unchanged for the fourth straight month in September, in line with expectations. The one-year and five-year Loan Prime Rates (LPRs) stood at 3.00% and 3.50%, respectively. This reflects a cautious approach to monetary easing amid easing US-China trade tensions, despite signs of a slowdown.
- Meanwhile, the Federal Reserve last week lowered its benchmark rate for the first time since December and saw the need for two more rate cuts this year amid worries about a softening US labor market. This marks a significant divergence in comparison to the BoJ's relative hawkish stance and could help limit deeper losses for the lower-yielding Japanese Yen.
- The US Dollar is seen building on last week's goodish rebound from its lowest level since July 2022 amid a hawkish assessment of Fed Chair Jerome Powell's remarks. Powell said that the Fed's rate reduction move was a risk management cut and that he doesn't feel the need to move quickly on interest rates. This remains supportive of the USD/JPY pair's move up.
- There isn't any relevant market-moving economic data due for release on Monday, either from Japan or the US. Hence, traders will closely scrutinize comments from a slew of influential FOMC members, including Powell. This, in turn, will drive the USD demand later during the North American session and provide some meaningful impetus to the currency pair.
USD/JPY is likely to attract some buyers and find decent support near 147.70-147.60 area
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From a technical perspective, acceptance above the 148.00 round figure factors the USD/JPY bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and back the case for further appreciation. That said, any subsequent move up is more likely to confront stiff resistance near the 200-day Simple Moving Average (SMA), currently pegged near the 148.60 region. A sustained strength beyond will reaffirm the positive bias and allow spot prices to climb further beyond the 149.00 round figure, towards testing the monthly swing high, around the 149.20 zone.
On the flip side, the 147.70-147.65 region could offer immediate support, below which the USD/JPY pair could accelerate the slide towards the 147.00 mark. A convincing break below the latter would expose the 146.20 horizontal support before spot prices extend the downward trajectory towards the 145.50-145.45 region, or the lowest level since July 7, touched last Wednesday.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
