- The Japanese Yen continues to be weighed down by reduced bets for a December BoJ rate hike.
- The recent surge in the US bond yields and a positive risk tone also seem to undermine the JPY.
- Investors, however, seem reluctant ahead of the crucial FOMC/BoJ policy meetings this week.
The Japanese Yen (JPY) languishes near a multi-week low against its American counterpart amid firming expectations that the Bank of Japan (BoJ) will keep interest rates unchanged this week. Furthermore, expectations for a less dovish Federal Reserve (Fed) remain supportive of elevated US Treasury bond yields, which turns out to be another factor weighing on the lower-yielding JPY.
Apart from this, a generally positive risk tone undermines the safe-haven JPY, though bears seem reluctant to place aggressive bets heading into this week’s key central bank event risks. The US central bank is scheduled to announce its policy decision on Wednesday, followed by the BoJ on Thursday. In the meantime, subdued US Dollar (USD) demand should cap gains for the USD/JPY pair.
Japanese Yen bears turn cautious ahead of FOMC/BoJ policy meetings
- Expectations that the Bank of Japan will keep interest rates unchanged at the end of a two-day meeting on Thursday continue to undermine the Japanese Yen and lift the USD/JPY pair to a three-week high on Monday.
- Japan’s economy minister, Ryosei Akazawa said this Tuesday that the BoJ and the government will work together to conduct appropriate monetary policy and that the central bank should handle the specifics of monetary policy.
- The yield on the benchmark 10-year US government bond rose to its highest level since November 22 in reaction to data showing that a big part of the US economy expanded at the fastest pace in more than three years.
- The S&P Global flash US Services Purchase Managers Index (PMI) rose from 56.1 to 58.5 in December – the highest level in 38 months – and the Composite PMI surged from 54.9 in November to 56.6, or a 33-month high.
- This overshadowed a fall in the flash US Manufacturing PMI to a three-month low of 48.3 in December and reaffirmed market bets that the Federal Reserve will likely signal a slower pace of policy easing going forward.
- According to the CME Group’s FedWatch Tool, markets have fully priced in that the Fed will deliver a 25-basis-points rate cut on Wednesday, which keeps the US Dollar bulls on the defensive and caps the USD/JPY pair.
- Traders now look forward to the release of the US monthly Retail Sales data, which, along with the US bond yields, will drive the USD demand and produce short-term opportunities around the currency pair.
- The focus, however, will remain glued to the outcome of the highly-anticipated FOMC meeting on Wednesday and the crucial BoJ decision on Thursday, which should provide a fresh directional impetus to the JPY.
USD/JPY acceptance above 61.8% Fibo. supports prospects for further gains
From a technical perspective, Monday’s breakout through the 61.8% Fibonacci retracement level of the November-December fall from a multi-month peak and acceptance above the 154.00 round figure could be seen as a key trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and support prospects for a further appreciation for the USD/JPY pair. Hence, some follow-through buying beyond the overnight swing high, around the 154.45-154.50 area, should pave the way for a move towards reclaiming the 155.00 psychological mark. The momentum could extend further towards the next relevant hurdle near mid-155.00s en route to the 156.00 mark and the 156.25 resistance zone.
On the flip side, the 61.8% Fibo. resistance breakpoint, around the 153.65 area, now seems to protect the immediate downside ahead of the overnight low, around the 153.35 region. This is closely followed by the 153.00 mark, below which the USD/JPY pair could accelerate the fall towards the very important 200-day Simple Moving Average (SMA) pivotal support near the 152.10-152.00 region. A convincing break below the latter might shift the bias in favor of bearish traders and drag spot prices to the 151.00 round figure en route to the 150.00 psychological mark.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.
The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.
A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.
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