Forex Trading, News, Systems and More

Japanese Yen seems vulnerable near eight-month low against firmer USD | FXStreet

The Japanese Yen (JPY) languishes near its lowest level since February against a broadly firmer US Dollar (USD) through the first half of the European session on Friday and seems vulnerable to slide further. Investors now seem convinced that the Bank of Japan (BoJ) could resist further policy tightening amid expectations that Japan’s Prime Minister Sanae Takaichi will pursue aggressive fiscal spending plans. This overshadows stronger consumer inflation figures from Tokyo – Japan’s capital city – and continues to undermine the JPY.

Apart from this, the latest optimism led by a de-escalation of US-China trade tensions is seen as another factor weighing on the safe-haven JPY. The US Dollar (USD), on the other hand, stands firm near its highest level since early August in the wake of the US Federal Reserve’s (Fed) hawkish tilt, which forced investors to pare their bets for another interest rate cut in December. This, in turn, offers additional support to the USD/JPY pair. However, intervention fears might hold back the JPY bears from positioning for further losses.

Japanese Yen bears retain control amid BoJ rate hike uncertainty, receding safe-haven demand

  • The internal affairs ministry reported this Friday that the Consumer Price Index in Tokyo – Japan’s capital city – rose to the 2.8% YoY rate in October from 2.5% in the previous month. Adding to this, the core gauge, which excludes volatile fresh food prices, climbed from the 2.5% YoY rate in September to 2.8% during the reported month.
  • Furthermore, the core CPI that excludes both fresh food and energy prices, which has stayed above the Bank of Japan’s 2% target for three-and-a-half-years, rose to 2.8% from 2.5%. The data backs the case for the BoJ to keep raising interest rates gradually, which, in turn, provides a modest boost to the Japanese Yen during the Asian session.
  • The BoJ held rates steady at the end of a two-day meeting on Thursday despite two dissenting votes, with board members Naoki Tamura and Hajime Takata pushing for a hike to 0.75%. Moreover, BoJ Governor Kazuo Ueda said during the post-meeting press conference that there are no preset ideas about the timing of the next rate hike.
  • Moreover, Japan’s new Prime Minister Sanae Takaichi’s pro-stimulus stance could allow the BoJ to delay raising interest rates further, which, in turn, could act as a headwind for the JPY. The US Dollar, on the other hand, draws some support from the Federal Reserve’s hawkish tilt and should contribute to limiting losses for the USD/JPY pair.
  • The US central bank lowered its benchmark overnight borrowing rate for the second time this year, to a range of 3.75%-4%. However, Fed Chair Jerome Powell said that a further reduction in the policy rate at the December meeting is not a foregone conclusion. Traders were quick to react and trimmed their bets for more easing this year, which, in turn, pushed the USD to its highest level since early August on Thursday and the USD/JPY pair to an eight-month peak.
  • The US government shutdown has now entered its fifth week amid a deadlock in Congress on the Republican-backed funding bill, fueling economic concerns. This is holding back the USD bulls from placing aggressive bets. Traders now look to speeches from influential FOMC members for cues about the future rate-cut path and a fresh impetus.

USD/JPY could extend the upward trajectory towards reclaiming the 155.00 psychological mark

From a technical perspective, the overnight breakout through the 153.25-153.30 region, or the previous monthly swing high, and a subsequent strength beyond the 154.00 mark, was seen as a key trigger for the USD/JPY bulls. Moreover, oscillators on the daily chart are holding comfortably in positive territory and are still away from being in the overbought zone. This, in turn, backs the case for the emergence of some dip-buying at lower levels. Nevertheless, spot prices seem poised to climb further beyond mid-154.00s, towards the 154.75-154.80 region en route to the 155.00 psychological mark.

On the flip side, weakness below the 154.00 mark is likely to find decent support and remain limited near the 153.30-153.25 resistance-turned-support. This is followed by the 153.00 round figure, which, if broken decisively, might expose the overnight swing low, around the 152.15 region. Some follow-through selling below the 152.00 mark would negate any near-term positive bias and pave the way for deeper losses towards the 151.55-151.50 area before spot prices eventually drop to the 151.10-151.00 key support.

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.