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- The Japanese Yen continues with its struggle to gain any meaningful traction on Tuesday.
- Intervention fears lend some support, while the BoJ policy uncertainty acts as a headwind.
- Tuesday’s US macro data to provide some impetus ahead of the US PCE Price Index on Friday.
The Japanese Yen (JPY) extends its sideways consolidative price move during the Asian session on Tuesday and remains within the striking distance of the YTD low against its American counterpart touched last week. The Bank of Japan (BoJ) last week indicated that financial conditions would remain accommodative and fell short of offering any guidance about the pace of policy normalization. This, along with the underlying bullish sentiment around the equity markets, is seen undermining the JPY.
That said, speculations that Japanese authorities will intervene in the markets to stem any further JPY weakness continue to act as a tailwind. Apart from this, bets that the Federal Reserve (Fed) will start cutting interest rates in June keep the US Dollar (USD) bulls on the defensive and should cap the upside for the USD/JPY pair. Traders now look to the US economic data – Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index – for a fresh impetus.
Daily Digest Market Movers: Japanese Yen lacks firm intraday direction amid mixed fundamental cues
- Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, lifts the threat of actual intervention on Monday and turns out to be a key factor in lending some support to the Japanese Yen.
- Kanda said that the movement in the JPY was not in line with fundamentals and was driven by speculation and that authorities will take action against excessive fluctuations without ruling out any options.
- Adding to this, Finance Minister Shunichi Suzuki reiterated on Tuesday that it is important for currencies to move in a stable manner reflecting fundamentals and that rapid FX moves are undesirable.
- The Bank of Japan indicated last week that financial conditions would remain accommodative and fell short of offering any guidance about the pace of policy normalization, capping gains for the JPY.
- Consumer inflation in Japan remains above the central bank’s 2% target, which, along with the positive outcome of spring wage negotiations, supports prospects for further policy tightening by the BoJ.
- Last week, the Federal Reserve upgraded its real GDP growth estimates to 2.1% by the end of this year from 1.4%, as projected in December, and also raised the forecast for core inflation to 2.6% from 2.4%.
- The Fed, however, signaled that it remains on track to cut interest rates by 75 basis points this year despite concerns about still-sticky inflation and the incoming stronger-than-expected economic data.
- Atlanta Fed President Raphael Bostic said on Monday that he expects the US economy and inflation to slow gradually and anticipates the US central bank will lower the policy rate only once this year.
- Chicago Fed President Austan Goolsbee noted that three cuts in 2024 were in line with his thinking, though the US central bank needs to see progress in inflation and strike a balance with its dual mandate.
- Separately, Fed Governor Lisa Cook said inflation had fallen considerably, though the path of disinflation, as expected, has been bumpy and uneven, while the labor market has remained strong.
- Investors now look forward to the release of the BoJ Core CPI for some meaningful impetus ahead of the US macro data –Durable Goods Orders and the Conference Board’s Consumer Confidence Index.
Technical Analysis: USD/JPY bulls have the upper hand while above the 151.00 mark pivotal support
From a technical perspective, last week’s swing high, around the 151.85 region, could act as an immediate hurdle. Some follow-through buying beyond the multi-decade high, around the 152.00 mark touched in November 2022, will be seen as a fresh trigger for bullish traders. The USD/JPY pair might then build on its well-established uptrend witnessed since January 2023. On the flip side, the 151.00 mark now seems to have emerged as strong support, below which spot prices could accelerate the fall to the 150.25 region. This is followed by the 150.00 psychological mark, which, if broken, will expose the next relevant support near the 149.35-149.30 region before the pair eventually drops to the 149.00 round-figure mark.
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.
