- The Japanese Yen snapped a three-day winning streak against the USD on Wednesday.
- The US-China trade talks optimism is seen weighing heavily on the safe-haven JPY.
- A modest USD uptick further supports USD/JPY ahead of the FOMC policy decision.
The Japanese Yen (JPY) remains on the back foot against its American counterpart, though the downside remains cushioned amid mixed fundamental cues. The optimism over the de-escalation of trade tensions between the US and China – the world’s two largest economies – remains supportive of the risk-on impulse, which, in turn, is seen undermining traditional safe-haven assets, including the JPY.
However, expectations that the Bank of Japan (BoJ) will resume its rate-hiking cycle following last week’s dovish pause and geopolitical risk limit the JPY losses. Meanwhile, the US Dollar (USD) struggles to gain any meaningful traction as traders opt to wait for the outcome of a two-day FOMC meeting. This further contributes to capping the USD/JPY pair’s recovery from a nearly one-week low.
Japanese Yen is undermined by receding safe-haven demand; downside potential seems limited
- US Treasury Secretary Scott Bessent, along with US Trade Representative Jamieson Greer, will travel to Switzerland later this week for trade talks with Chinese Vice Premier He Lifeng. This comes after Bessent on Tuesday said the Trump administration could announce trade deals with some of the largest trade partners as early as this week and boost investors’ confidence.
- This, in turn, is seen undermining demand for traditional safe-haven assets and exerting pressure on the Japanese Yen during the Asian session on Wednesday. The US Dollar, on the other hand, edges higher following a three-day losing streak amid some repositioning trade ahead of the crucial FOMC decision and lifts the USD/JPY pair back above the 143.00 mark.
- The Federal Reserve is expected to leave interest rates unchanged at the end of a two-day policy meeting. Hence, the market focus will be on the accompanying policy statement. Apart from this, Fed Chair Jerome Powell’s comments at the post-meeting press conference will be scrutinized for cues about the future rate-cut path, which will drive the USD in the near term.
- Meanwhile, the Bank of Japan reiterated last week that it remains committed to raising rates further if the economy and prices move in line with its forecasts. Moreover, expectations that sustained wage hikes will boost consumer spending and inflation in Japan keep the door open for further policy normalization by the BoJ and interest rate hikes by the end of this year.
- Meanwhile, a Kremlin spokesman warned that an appropriate response will be given immediately if Ukraine does not halt the fire. Adding to this, Israel’s security Cabinet unanimously approved a plan to widen the military offensive in Gaza and gradually seize control of the territory. This keeps geopolitical risks in play and should limit deeper JPY losses.
USD/JPY technical setup supports prospects for emergence of fresh sellers near 143.55-143.60
From a technical perspective, last week’s failure near the 200-period Simple Moving Average (SMA) on the 4-hour chart and the subsequent downfall favor bearish traders. Moreover, oscillators on daily/hourly charts are holding in negative territory, suggesting that the path of least resistance for the USD/JPY pair remains to the downside. Hence, any further move up might still be seen as a selling opportunity near the 143.55-143.60 region. This, in turn, should cap spot prices near the 144.00 mark. This is followed by the 144.25-144.30 supply zone, which, if cleared decisively, might trigger a short-covering rally and lift spot prices to the 145.00 psychological mark.
On the flip side, the 142.35 area, or the weekly low, now seems to protect the immediate downside for the USD/JPY pair ahead of the 142.00 mark. A convincing break below the latter could make spot prices vulnerable to accelerate the fall further towards the next relevant support near the 141.60-141.55 region en route to the 141.00 round figure.
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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