- The Japanese Yen stalls the overnight recovery from a two-week low against the USD.
- Domestic political uncertainty and a positive risk tone undermine the safe-haven JPY.
- The divergent BoJ-Fed policy expectations act as a tailwind for the lower-yielding JPY.
The Japanese Yen (JPY) extends its sideways consolidative price move against a mildly positive US Dollar (USD) through the Asian session on Tuesday amid mixed cues. Investors remain worried that the Bank of Japan (BoJ) could further delay raising borrowing costs amid domestic political uncertainty and economic headwinds stemming from US tariffs . This, along with a generally positive tone around the equity markets, is seen undermining the safe-haven JPY.
Meanwhile, hawkish dissents to the BoJ’s on-hold decision last week could be a prelude to impending rate hikes. This marks a significant divergence in comparison to the US Federal Reserve’s (Fed) dovish outlook, signaling two more rate cuts by the end of this year, which could limit the downside for the lower-yielding JPY. Furthermore, the US Dollar (USD) might struggle to attract any meaningful buyers amid dovish Fed expectations and cap the USD/JPY pair.
Japanese Yen struggles to gain traction amid BoJ rate hike uncertainty
- A Liberal Democratic Party (LDP) leadership election will take place on 4 October, and the outcome could affect the likely timing of the next rate hike by the Bank of Japan if a candidate with dovish views is selected.
- Shinjiro Koizumi, seen as a frontrunner in the ruling party’s leadership race, said that the government must be mindful of the need for fiscal discipline, but achieving solid economic growth is the basis for guiding sound fiscal policy.
- Separately, Japan’s Prime Minister contender, Yoshimasa Hayashi, said that the government must avoid issuing deficit-covering bonds to fund spending. Furthermore, Sanae Takaichi noted that the government should be mindful of the risk of causing yield rise in guiding fiscal policy.
- Wall Street indices have hit a series of record highs since last week, and the spillover effect leads to a further rise in Asian stocks. This, in turn, keeps a lid on the safe-haven Japanese Yen during the Asian session on Tuesday.
- There were two dissents to the BoJ’s decision to leave the interest rate unchanged at 0.5%. Moreover, BoJ Governor Kazuo Ueda showed readiness to hike rates further if the economy and prices moved in line with forecasts.
- Investors are now pricing a greater chance of a 25 basis point BoJ rate hike in October amid signs of economic resilience. This marks a significant divergence in comparison to the Federal Reserve’s dovish outlook.
- The US central bank lowered borrowing costs last Wednesday for the first time since December and signaled that more interest rate cuts would follow through by the year-end amid signs of a softening labor market.
- Traders now believe that interest rates will drop much faster than the Fed is planning and are betting on the possibility that the short-term rate, currently in the 4.00%-4.25% range, will fall under 3% by the end of 2026.
- NATO countries have accused Russia of violating the airspace of alliance members Estonia, Poland, and Romania. Russia, however, rejected the claims and accused the European powers of levying baseless accusations.
- Despite recent diplomatic efforts to find ways to end the more than three-year war, fighting has intensified in recent months. In fact, Russia and Ukraine accused each other of deadly drone strikes on civilian areas on Monday.
- Hamas escalated its attacks and launched multiple rockets on Israel amid the intensifying attacks by the Israeli Defense Forces inside Gaza City. This keeps geopolitical risks in play and could benefit the safe-haven JPY.
- Traders now look forward to Fed Chair Jerome Powell’s scheduled speech later during the North American session, which will influence the USD price dynamics and provide some meaningful impetus to the USD/JPY pair.
- In the meantime, the flash PMIs could offer some insight into the global economic health, which, in turn, would play a key role in driving the broader risk sentiment and demand for the traditional safe-haven JPY.
- The focus, however, would be on two key inflation figures from Japan’s capital city, Tokyo, and the US Personal Consumption Expenditure (PCE) Price Index, due for release during the latter part of the week, on Friday.
USD/JPY needs to surpass 148.00 to back the case for any meaningful upside
The USD/JPY pair could find some support near last Friday’s post-BoJ swing low, around the 147.20 zone. This is followed by the 147.00 mark, below which spot prices could accelerate the fall towards the 146.20 horizontal support. The downward trajectory could extend further towards the 145.50-145.45 region, or the lowest level since July 7, touched last Wednesday.
On the flip side, the 148.00 round figure could act as an immediate hurdle ahead of the 148.35-148.40 region, or a two-week high touched on Monday, and the very important 200-day Simple Moving Average (SMA), around the 148.55 area. Some follow-through buying could lift the USD/JPY pair to the 149.00 mark en route to the monthly high, around the 149.15 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.