Hawkish Fed expectations underpin the USD and lend additional support to the USD/JPY pair.
Intervention fears might cap the major ahead of the crucial FOMC monetary policy decision.
The Japanese Yen (JPY) enters a bearish consolidation phase and oscillates in a range near a four-month low touched against its American counterpart during the Asian session on Wednesday. The Bank of Japan (BoJ) raised the short-term interest rates for the first time since 2007 and scrapped its complex Yield Curve Control (YCC) policy at the end of the March meeting on Tuesday. The central bank, however, indicated that financial conditions would remain accommodative and stopped short of offering any guidance about future policy steps, or the pace of policy normalization. This, along with the prevalent risk-on mood, continues to undermine the safe-haven JPY for the seventh straight day.
The US Dollar (USD), on the other hand, continues to draw support from growing acceptance that the Federal Reserve (Fed) will stick to its higher-for-longer interest rates narrative in the wake of still-sticky inflation. The hawkish outlook, meanwhile, remains supportive of elevated US Treasury bond yields, resulting in the widening of the US-Japan rate differential and exerting additional downward pressure on the JPY. This, in turn, suggests that the path of least resistance for the currency pair is to the upside. Bulls, however, prefer to wait for the FOMC policy decision for cues about the rate-cut path before positioning for an extension of the recent strong uptrend witnessed over the past week or so.
The lack of forward guidance for further tightening disappointed hawkish Bank of Japan traders and continues to weigh heavily on the Japanese Yen, dragging it to the lowest level since November 2023 on Wednesday.
The BoJ, in a historic move on Tuesday, decided to end its negative interest rate policy and announced its first rate increase since 2007, though pledged to keep monetary conditions accommodative for the time being.
The BoJ indicated that it will reduce purchases of commercial paper and corporate bonds, though will continue to purchase Japanese government bonds, and step in when necessary, if yields run too high and too fast.
The robust US consumer and consumer inflation figures fuelled speculations that the Federal Reserve could modify its forward guidance to two 25 basis points rate cuts in 2024 instead of the three projected previously.
Hence, the focus will remain glued to the outcome of the highly-anticipated two-day FOMC meeting and the updated economic projections, including the so-called “dot plot” for fresh cues about the future rate-cut path.
In the meantime, hawkish Fed expectations remain supportive of elevated US Treasury bond yields and favour the USD bulls, though intervention fears could limit losses for the JPY and cap the upside for the currency pair.
From a technical perspective, the recent solid bounce from the vicinity of the very important 200-day Simple Moving Average (SMA) and a subsequent move beyond the 151.00 mark could be seen as a fresh trigger for bullish traders. Adding to this, oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought territory, validating the near-term constructive setup for the USD/JPY pair. Hence, some follow-through strength back towards the 152.00 neighbourhood, or a multi-decade peak touched in October 2022, looks like a distinct possibility.
On the flip side, any corrective decline now seems to attract fresh buyers and is more likely to remain limited near the 150.80 strong horizontal resistance breakpoint. A sustained break below, however, might prompt some technical selling and drag the USD/JPY pair back towards the 150.00 psychological mark. The next relevant support is pegged near the 149.50 area, which, if broken decisively, might shift the bias in favour of bearish traders and pave the way for deeper losses.
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.
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.
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.
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.
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