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Japanese Yen awaits Fed decision before the next leg of a directional move

  • The Japanese Yen continues to be undermined by the divergent BoJ-Fed policy expectations.
  • Bets that the Fed will keep rates higher for longer, lift the USD, and lend support to USD/JPY.
  • The risk-off impulse underpins the safe-haven JPY and caps gains ahead of the FOMC decision.

The Japanese Yen (JPY) registered heavy losses against its American counterpart on Tuesday and reversed a major part of the previous day’s sharp gains led by a possible intervention by Japanese authorities. The main driver of the JPY weakness is the interest-rate differential between Japan and the United States (US), which is expected to remain wide for some time. This, along with a goodish pickup in the US Dollar (USD) demand, provided an additional lift to the USD/JPY pair and contributed to the strong intraday move up. 

The USD buying remained unabated during the Asian session on Wednesday amid growing acceptance that the Federal Reserve (Fed) will keep interest rates higher for longer, bolstered by incoming US macro data that pointed to still sticky inflation. That said, the risk-off impulse – as depicted by the overnight slump in the US equity markets and a sea of red across the Asian equity markets – lends some support to the safe-haven JPY. This, in turn, acts as a headwind for the USD/JPY pair ahead of the crucial FOMC policy decision later today.

Daily Digest Market Movers: Japanese Yen fails to capitalize on possible intervention-led gains amid BoJ’s uncertain rate outlook

  • The Japanese Yen remains on the defensive on Wednesday amid the Bank of Japan’s cautious approach towards further policy tightening and uncertain rate outlook, albeit the risk-off impulse helps limit deeper losses.
  • The headline au Jibun Bank Japan Manufacturing PMI was finalized at 49.6 for April, which was noticeably higher than the previous month’s reading of 48.2 and also marked the slowest contraction in eight months.
  • Reports suggest that Japan may provide tax breaks for companies converting foreign profits into the JPY, though this does little to provide respite to bulls or any meaningful impetus to the USD/JPY pair amid a stronger US Dollar. 
  • From the US, the Labor Department reported on Tuesday that labor costs increased more than expected during the first quarter amid a rise in wages and benefits, confirming the surge in inflation early in the year.
  • This comes on top of Friday’s release of the US Personal Consumption Expenditures (PCE) Price Index, which pointed to still sticky inflation, and reaffirmed bets that the Federal Reserve will delay cutting interest rates.
  • The data reaffirmed market bets that the US central bank will begin the rate-cutting cycle only in September, lifting the US Dollar to over a two-week high and providing a strong boost to the USD/JPY pair on Tuesday.
  • The USD bulls, meanwhile, seem unaffected by the Conference Board’s survey, showing that the Consumer Confidence Index fell to 97.0 in April – the lowest level since July 2022 – from a downwardly revised 103.1 in March.
  • Adding to this, the Chicago PMI remained in negative territory for the fifth straight month and dropped sharply from 41.4 to 37.9 in April, or the lowest level since November 2022, albeit does little to hinder the USD rise.
  • The focus, meanwhile, remains on the crucial FOMC policy decision, scheduled to be announced later during the US session, which will influence the USD and provide a fresh directional impetus to the USD/JPY pair.
  • Heading into the key central bank event risk, traders on Wednesday will take cues from the US macroeconomic releases – the ADP report on private-sector employment, JOLTS Job Openings and ISM Manufacturing PMI. 

Technical Analysis: USD/JPY bulls now await strength beyond the 158.00 mark before positioning for any further appreciating move

From a technical perspective, the suspected intervention-inspired slump on Monday showed some resilience below the 200-hour Simple Moving Average (SMA). The subsequent move up, along with positive oscillators on hourly charts, suggests that the path of least resistance for the USD/JPY pair is to the upside. Bulls, however, might prefer to wait for a move beyond the 158.00 mark, or the 50% Fibonacci retracement level of the early week steep decline, before placing fresh bets. Spot prices might then surpass an intermediate hurdle near the 158.40-158.45 region and aim to reclaim the 159.00 mark.

On the flip side, any downfall below the 157.50-157.45 immediate support might now attract fresh buyers and remain limited by the 157.00 mark. The latter should act as a key pivotal point, which, if broken decisively, could drag the USD/JPY pair to the 156.35 region ahead of the 156.00 mark. The downward trajectory could extend further towards the 155.35 region en route to the 155.00 psychological mark and the weekly swing low, around mid-154.00s, touched on Monday. 

Japanese Yen FAQs

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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