Japanese Yen depreciates despite a rising odds of a BoJ rate hike

• The Japanese Yen declines despite a hawkish mood surrounding the BoJ’s policy outlook.
• The downside of the JPY could be limited as traders expect the BoJ to increase interest rates further.
• US Fed Chair Powell signaled a rate cut soon, which puts downward pressure on the US Dollar.

The Japanese Yen (JPY) continues to lose ground against the US Dollar (USD) for the second consecutive day on Tuesday. However, the downside of the JPY could be restrained due to the hawkish mood surrounding the Bank of Japan (BoJ).

Additionally, the contrasting statements from the BoJ and the Federal Reserve (Fed) regarding their policy outlooks are putting downward pressure on the USD/JPY pair. BoJ Governor Kazuo Ueda stated in Parliament on Friday that the central bank could raise interest rates further if its economic projections are accurate.

Meanwhile, Fed Chair Jerome Powell stated at the Jackson Hole Symposium, “The time has come for policy to adjust.” However, Powell did not specify when rate cuts would begin or their potential size. Additionally, San Francisco Federal Reserve President Mary Daly stated on Monday in an interview with Bloomberg TV that “the time is upon us” to begin cutting interest rates, likely starting with a quarter-percentage point reduction.

Daily Digest Market Movers: Japanese Yen edges lower despite a hawkish BoJ

• According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting.
• Japan’s Finance Minister Shunichi Suzuki stated on Tuesday that foreign exchange rates are influenced by a variety of factors, including monetary policies, interest rate differentials, geopolitical risks, and market sentiment. Suzuki added that it is difficult to predict how these factors will impact FX rates.
• US Durable Goods Orders surged by 9.9% month-over-month in July, rebounding from a 6.9% decline in June. This increase significantly outpaced the expected 4.0% rise, marking the largest gain since May 2020.
• Bloomberg reported on Friday that Philadelphia Fed President Patrick Harker emphasized the need for the US central bank to lower interest rates gradually. Meanwhile, Reuters reported that Chicago Fed President Austan Goolsbee noted that monetary policy is currently at its most restrictive, with the Fed now focusing on achieving its employment mandate.
• Bank of Japan (BoJ) Governor Kazuo Ueda addressed the Japanese parliament on Friday, stating that he is “not considering selling long-term Japanese government bonds (JGBs) as a tool for adjusting interest rates.” He noted that any reduction in JGB purchases would only account for about 7-8% of the balance sheet, which is a relatively small decrease. Ueda added that if the economy aligns with their projections, there could be a phase where they might adjust interest rates slightly further.
• Japan’s National Consumer Price Index increased by 2.8% year-on-year in July, maintaining this rate for the third consecutive month and remaining at its highest level since February. Additionally, the National CPI excluding Fresh Food rose by 2.7%, the highest reading since February, aligning with expectations.
• The US Composite PMI edged down to 54.1 in August, a four-month low, from 54.3 in July, but remained above market expectations of 53.5. This indicates continued expansion in US business activity, marking 19 consecutive months of growth.
• FOMC Minutes for July’s policy meeting indicated that most Fed officials agreed last month that they would likely cut their benchmark interest rate at the upcoming meeting in September as long as inflation continued to cool.

Technical Analysis: USD/JPY tests a psychological level at 145.00

USD/JPY trades around 144.90 on Tuesday. Analysis of the daily chart shows that the pair is testing the downtrend line, suggesting a weakening bearish bias. However, the 14-day Relative Strength Index (RSI) remains slightly above 30, suggesting a confirmation of a bearish trend.

On the downside, if the USD/JPY pair stays below the downtrend line, it could hover around the seven-month low of 141.69, recorded on August 5. A break below this level might push the pair toward the throwback support at 140.25.

In terms of resistance, the USD/JPY pair may challenge the immediate barrier at the nine-day Exponential Moving Average (EMA) around the 145.67 level. A breakthrough above this level could pave the way for the pair to explore the area near the throwback-turned-resistance at 154.50.

USD/JPY: Daily Chart