Japanese Yen remains weaker due dovish sentiment surrounding the BoJ

• The Japanese Yen edges lower as the BoJ is expected to maintain its current interest rates on Friday.
• The stable Japanese equity market has undermined the JPY.
• The US Dollar holds ground due to reduced odds of the two Fed rate cuts in 2024.

The Japanese Yen (JPY) edges lower for the third consecutive trading day on Tuesday. The USD/JPY pair received support from a stronger US Dollar (USD) as investors remained cautious ahead of the Federal Reserve’s (Fed) decision, along with the US inflation figures for May on Wednesday.

The Japanese Yen struggled after mixed data was released on Monday. Japan’s Gross Domestic Product (GDP) Annualized showed that the economy contracted less than expected in the first quarter. Meanwhile, the GDP (QoQ) shrank in Q1, matching flash data. Additionally, the stable performance in the equity market has undermined the JPY. Investors are looking forward to the Bank of Japan’s (BoJ) policy decision on Friday.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, maintains its position due to the reduced likelihood of the two Federal Reserve (Fed) interest rate cuts in 2024. The CME FedWatch Tool indicates that the likelihood of a Fed rate cut in September by at least 25 basis points has decreased to nearly 49.0%, down from 59.5% a week earlier.

Daily Digest Market Movers: Japanese Yen edges lower due to dovish BoJ

• Nearly two-thirds of economists surveyed in a Reuters poll on Tuesday anticipate that the Bank of Japan will opt to commence tapering its monthly bond purchases at Friday’s policy meeting. This decision marks a significant initial move aimed at gradually reducing the central bank’s burgeoning balance sheet. Takeshi Minami, Chief Economist at Norinchukin Research Institute said, “There is no longer any reason to continue large-scale purchases of government bonds since it has been judged that a 2% rise in prices is within reach.”
• The Nikkei 225 Index climbed on Tuesday, marking its second consecutive session of gains. This uptrend mirrored the positive performance on Wall Street, where technology stocks propelled equity markets higher.
• Japan Finance Minister Shunichi Suzuki said on Tuesday it is important to continue efforts to achieve economic growth and attain fiscal health to retain confidence in the country’s fiscal policy, per Reuters.
• Japan’s 10-year government bond yield moves above 1.02% ahead of the Bank of Japan’s (BoJ) policy meeting on Friday. The central bank is expected to maintain its current interest rates, while traders are closely watching for any potential reduction in the bank’s monthly bond purchases.
• On Monday, Japan’s Gross Domestic Product (GDP) Annualized contracted by 1.8% in the first quarter, compared to a previous decline of 2.0%. The figures slightly exceeded market forecasts of a 1.9% decrease. Meanwhile, Japan’s GDP (QoQ) shrank by 0.5%, which is in line with the flash data.
• Rabobank suggested in its weekly report that the Federal Reserve may cut rates in September and December, more likely because of a deteriorating economy than because of progress on inflation. This is because they think that the US economy is entering a stagflationary phase with persistent inflation and an economic slowdown that is likely to end in a mild recession later this year.
• According to the US Bureau of Labor Statistics (BLS) on Friday, May’s US Nonfarm Payrolls (NFP) increased by 272,000, up from 165,000 in April. The wage inflation, as measured by the Average Hourly Earnings, rose 4.1% YoY in May from 4.0% (revised from 3.9%) in April, above the market consensus of 3.9%.
• According to Reuters, while speaking to parliament on Thursday, Bank of Japan (BoJ) Governor Kazuo Ueda stated that inflation expectations are gradually rising but have yet to reach 2%. Ueda said, “We are still scrutinizing market developments since the March decision. As we proceed in exiting our massive monetary stimulus, it’s appropriate to reduce bond purchases.”

Technical Analysis: USD/JPY maintains a position around 157.00

USD/JPY trades around 157.20 on Tuesday. Analysis of the daily chart reveals a bullish inclination as the pair consolidates within an ascending channel pattern. Additionally, the 14-day Relative Strength Index (RSI) sits above the 50 level, indicating a propensity for upward momentum.

A significant hurdle is noticeable at the psychological level of 158.00. A breakthrough above this level could provide support, potentially guiding the USD/JPY pair toward the vicinity of the upper boundary near the level of 158.60. Further resistance is observed at 160.32, marking its highest level in over thirty years.

To the downside, the lower boundary of the ascending channel, approximately at the level of 154.90, stands out as the primary support, coinciding with the 50-day Exponential Moving Average (EMA) at 154.86. A breach below this level might intensify downward pressure on the USD/JPY pair, potentially directing it toward the throwback support area around 152.80.

USD/JPY: Daily Chart