USD/JPY steadily climbs back closer to mid-143.00s, upside potential seems limited

USD/JPY ticks higher for the second straight day and draws support from a combination of factors.
A downward revision of Japan’s GDP print and a positive risk tone undermines the safe-haven JPY.
Reduced bets for a 50 bps Fed rate cut in September push the USD higher and further lend support.

Haresh Menghani FXStreet

The USD/JPY pair turns positive for the second straight day following an early Asian session dip to the 142.85 region, albeit it lacks bullish conviction. Spot prices currently trade with a mild positive bias just below mid-143.00s and remain well within the striking distance of a one-month low touched last Friday.

The Japanese Yen (JPY) continues to be undermined by data published on Monday, which showed that the economy grew at a slightly slower pace than initially reported in the second quarter. This could possibly complicate the Bank of Japan's (BoJ) plan to hike interest rates further in the coming months. Apart from this, a generally positive risk tone around the equity markets dents demand for the safe-haven JPY and acts as a tailwind for the USD/JPY pair amid some follow-through US Dollar (USD) buying interest.

The USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs to a multi-day peak amid reduced bets for a larger, 50 basis points (bps) interest rate cut by the Federal Reserve (Fed) in September. The markets, however, have fully priced in at least a 25 bps Fed rate cut move later this month. In contrast, the BoJ is expected to hike interest rates again by the end of this year. This might hold back bullish traders from placing aggressive bets around the USD/JPY pair and cap gains.

Investors might also prefer to move to the sidelines and wait for the release of the US consumer inflation figures on Wednesday before placing fresh directional bets. Hence, a strong follow-through buying is needed in order to confirm that the USD/JPY pair has formed a near-term bottom and positioning for any meaningful appreciating move amid absent relevant US macro data on Tuesday. That said, speeches by influential FOMC members might provide some impetus later during the US session.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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