- The Japanese Yen is undermined by the BoJ's cautious outlook and a positive risk tone.
- Intervention fears might limit losses for the JPY and cap any further gains for USD/JPY.
- Traders prefer to wait for a break of a short-term range ahead of the US NFP on Friday.
The Japanese Yen (JPY) remains depressed against its American counterpart heading into the European session on Thursday and trades just above a multi-decade low touched last week. The Bank of Japan's (BoJ) dovish outlook, saying that monetary policy will remain easy for some time, along with a positive risk tone, turn out to be key factors undermining the safe-haven JPY. That said, speculations that Japanese authorities will intervene in the market to prop up the domestic currency hold back the JPY bears from placing aggressive bets.
The US Dollar (USD), on the other hand, prolongs this week's corrective pullback from its highest level since February 14 for the third successive day amid the uncertainty over the Federal Reserve's (Fed) rate-cut path. This further contributes to keeping the USD/JPY pair below the 152.00 mark. The downside, however, remains cushioned in the wake of expectations that the gap between US and Japanese rates will stay wide. Traders might also prefer to move to the sidelines ahead of the release of the key US NFP report on Friday.
Daily Digest Market Movers: Japanese Yen remains vulnerable amid divergent BoJ-Fed policy expectations
- Japanese government officials continued with their jawboning to defend the domestic currency, which, in turn, is seen lending some support to the Japanese Yen, though the upside potential seems limited.
- Japan's former Vice Finance Minister for International Affairs, Tatsuo Yamasaki, said earlier this week that the country is ready to intervene in the currency market should the JPY weaken beyond its current range.
- The Automatic Data Processing reported on Wednesday that the US private sector employment rose by 184K in March against the 148 expected and the previous month's upwardly revised reading of 155K.
- Separately, data published by the Institute for Supply Management showed that the US Services PMI dropped to 51.4 in March from the 52.6 previous, while the Prices Paid Index declined to 53.4 from 58.6.
- Federal Reserve Chairman Jerome Powell did not specify the timing or scale of the potential cuts and said on Wednesday that it would take a while to evaluate the current state of inflation before the interest rate cut.
- This comes after several Fed officials this week warned that the central bank was in no hurry to begin cutting rates, though the markets are still pricing in a greater chance of a move at the June policy meeting.
- The yield on the benchmark 10-year US government bond retreated after hitting a four-month high on Wednesday and prompted aggressive US Dollar selling, capping the USD/JPY pair ahead of the 152.00 mark.
- This boosted investors' appetite for riskier assets, which, along with the Bank of Japan's (BoJ) dovish language, signaling that the next rate hike will be some time away, should keep a lid on the safe-haven JPY.
Technical Analysis: USD/JPY seems poised to breakout through a short-term range, 152.00 holds the key for bulls
From a technical perspective, the USD/JPY pair has been oscillating in a range over the past two weeks or so. Against the backdrop of a strong rally from the March swing low, this might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding in the positive territory and are still far from being in the overbought zone, suggesting that the path of least resistance for spot prices is to the upside. That said, it will still be prudent to wait for a sustained breakout through the 152.00 round-figure mark before positioning for any further gains.
On the flip side, any meaningful slide might continue to find decent support near the 151.00 mark or the lower end of the short-term trading range. A convincing break through the said handle, leading to a subsequent fall below the 150.80-150.75 horizontal resistance breakpoint, now turned support, has the potential to drag the USD/JPY pair to the next relevant support near the 150.25 region. This is closely followed by the 150.00 psychological mark, which, if broken decisively, might shift the bias in favor of bearish traders and pave the way for a further corrective decline towards 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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