- The Japanese Yen meets with a fresh supply and stalls its recovery move from over a two-month low.
- The uncertainty over the BoJ’s rate-hike plans and the upbeat mood undermines the safe-haven JPY.
- Bets for a less aggressive Fed easing revive the USD demand and lend support to the USD/JPY pair.
The Japanese Yen (JPY) attracts some sellers following an intraday uptick on Monday and touches a fresh daily low against its American counterpart heading into the European session. The uncertainty over the timing and pace of further rate hikes by the Bank of Japan (BoJ) turns out to be a key factor that fails to assist the JPY to capitalize on a modest recovery from its lowest level since early August touched last week.
Apart from this, the upbeat market mood further undermines the safe-haven JPY, which, along with renewed US Dollar (USD) buying, assists the USD/JPY pair to rebound over 50 pips from the vicinity of the 149.00 mark, or the daily low. Meanwhile, the recent comments from Japanese authorities fueled speculations about a possible government intervention to prop up the domestic currency and should limit the JPY losses.
Furthermore, the risk of a further escalation of geopolitical tensions in the Middle East and a broader regional war might hold back traders from placing aggressive bearish bets around the JPY in the absence of relevant economic data on Monday. Investors might also prefer to move to the sidelines ahead of the general election in Japan on October 27, the BoJ meeting on October 31 and the US Presidential election on November 5.
Daily Digest Market Movers: Japanese Yen is weighed down by a combination of factors
- Japan's top currency diplomat, Atsushi Mimura, warned against speculative trading and said on Friday that authorities are watching FX moves with a high sense of urgency.
- Adding to this, Japan's Deputy Chief Cabinet Secretary Kazuhiko Aoki noted that it is important for currencies to move in a stable manner reflecting economic fundamentals.
- The comments fueled speculations about a possible government intervention to prop up the domestic currency, albeit failed to assist the Japanese Yen to capitalize on its modest gains.
- Bank of Japan Governor Kazuo Ueda said on Friday that the economy was recovering moderately and the underlying inflation is likely to gradually accelerate to the 2% target.
- Ueda added that the central bank must focus on the economic impact of unstable markets and risks from overseas, suggesting the BoJ was in no rush to raise interest rates further.
- Investors cheered the launch of two funding schemes by the People's Bank of China (PBOC) aimed at supporting the development of capital markets, lifting global equity markets.
- The Israeli army launched a series of air strikes across Lebanon and also intensified attacks across Gaza, raising the risk of a further escalation of tensions in the Middle East.
- The yield on the benchmark 10-year US government bond holds above the 4% mark amid bets for a regular 25 basis points rate cut by the Federal Reserve in November.
- The US Dollar stalls its corrective pullback from the highest level touched since early August last Thursday, which, in turn, might act as a tailwind for the USD/JPY pair.
Technical Outlook: USD/JPY seems poised to surpass the 150.00 psychological mark
From a technical perspective, oscillators on the daily chart are holding in positive territory and warrant caution before placing aggressive bearish bets. That said, weakness below the 149.00 mark and the 148.85 horizontal support could drag the USD/JPY pair further towards the 148.20 region. This is closely followed by the 148.00 round figure, below which the corrective decline could extend further towards the 147.35-147.30 area en route to sub-147.00 levels.
On the flip side, the 149.70-149.75 region now seems to act as an immediate hurdle ahead of the 150.00 psychological mark and the 150.30 area, or the monthly peak touched last week. A sustained strength beyond should pave the way for a move towards the August swing high, around the 150.85-150.90 zone. Some follow-through buying will be seen as a fresh trigger for bullish traders and allow the USD/JPY pair to reclaim the 152.00 before targeting the next relevant hurdle near the 152.70-152.75 area.
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.
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