Japanese Yen struggles to lure buyers, remains vulnerable near multi-decade low

  • The Japanese Yen hangs near a multi-decade against the USD amid the BoJ’s dovish outlook.
  • The divergent Fed-BoJ expectations support prospects for a further JPY depreciation move.
  • Intervention fears hold back the JPY bears from placing fresh bets and cap the USD/JPY pair.

The Japanese Yen (JPY) extends the sideways consolidative price move against its American counterpart and languishes near a multi-decade low heading into the European session on Tuesday. the Bank of Japan's (BoJ) cautious approach and uncertain outlook for future rate hikes, along with speculations that the Federal Reserve (Fed) could delay cutting interest rates, suggests that the gap between US and Japanese rates will stay wide. This, along with a generally positive tone around the equity markets, continues to undermine demand for the safe-haven JPY. 

The US Dollar (USD), on the other hand, draws some support from elevated US Treasury bond yields, bolstered by reduced bets for the total number of Fed rate cuts in 2024. This, in turn, is seen as another factor acting as a tailwind for the USD/JPY pair. Investors, however, remain on alert in the wake of the possibility that Japanese authorities will intervene in the market to prevent a destabilizing fall in the domestic currency. This, in turn, helps limit losses for the JPY as traders look to the release of the US consumer inflation figures and the FOMC minutes on Wednesday for a fresh impetus.

Daily Digest Market Movers: Japanese Yen is undermined by dovish BoJ, bears seem reluctant amid intervention fears 

  • The recent jawboning from Japanese authorities, showing readiness to intervene in the markets to address any excessive falls in the domestic currency, helps limit the downside for the Japanese Yen.
  • Japan's Prime Minister Fumio Kishida said on Friday that excessive volatility in currency rates is undesirable and warned that authorities will use all available means to deal with excessive JPY falls.
  • Japan Finance Minister Suzuki reiterated on Monday that FX needs to move stably reflecting fundamentals and he won't rule out any option, and will deal appropriately with FX moves.
  • The Bank of Japan's (BoJ) cautious approach, indicating that accommodative financial conditions will be maintained for an extended period, fails to assist the JPY in attracting any meaningful buying.
  • Moreover, data released on Monday showed that inflation-adjusted real wages for Japanese workers fell in February for the 23rd consecutive month and further contributed to keeping a lid on the JPY. 
  • The optimism over talks on a potential Israel-Hamas ceasefire remains limited in the wake of Israeli Prime Minister Benjamin Netanyahu's threat of a ground invasion in the southern Gaza city of Rafah.
  • The upbeat US jobs report released on Friday, along with the recent hawkish remarks by Federal Reserve officials, keeps the US Treasury bond yields elevated and acts as a tailwind for the US Dollar.
  • The US Treasury bond yields climbed to their highest levels since late November as investors continue scaling back their bets for how deeply the Fed will be able to cut interest rates this year.
  • Chicago Fed President Austan Goolsbee acknowledged on Monday that the US economy remains strong but wondered how long the central bank can be restrictive without damaging the economy.
  • Minneapolis President Neel Kashkari said that the central bank cannot stop short on the inflation fight and that the labor market is not red hot like it was 12 months ago but its still tight.

Technical Analysis: USD/JPY consolidates in a two-week-old trading range, bullish potential seems intact

From a technical perspective, the range-bound price action witnessed over the past three weeks or so might still be categorized as a bullish consolidation phase against the backdrop of the recent rally from the March swing low. Moreover, oscillators on the daily chart are holding in the positive territory and are still away from being in the overbought zone, suggesting that the path of least resistance for the USD/JPY pair is to the upside. That said, it will still be prudent to wait for a sustained move and acceptance above the 152.00 mark before positioning for any further gains. 

In the meantime, any corrective pullback is more likely to find some support and be bought into near the 151.30 horizontal zone. This should help limit the downside for the USD/JPY pair near the 151.00 mark. A convincing break below the latter, however, might prompt some technical selling and expose Friday's swing low, around the 150.30 region. This is followed by the 150.00 psychological mark, which, if broken decisively, will shift the near-term bias in favor of bearish traders. Spot prices might then accelerate the fall to the 149.35-149.30 region en route 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.


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