The Japanese Yen (JPY) stalls its modest intraday pullback from a one-and-a-half-week low, touched against a broadly weaker US Dollar (USD) earlier this Wednesday, amid reports that the Bank of Japan (BoJ) is ramping up rate hike messaging. However, the prospect for further policy tightening in December or January is still finely balanced. Moreover, concerns about Japan’s ailing fiscal position on the back of Prime Minister Sanae Takaichi’s pro-stimulus stance, along with the prevalent risk-on environment, turn out to be key factors undermining the safe-haven JPY.
Meanwhile, data released earlier today underscored the BoJ’s view that a tight job market will keep pushing up wages and service-sector inflation. This reaffirms expectations for further BoJ policy tightening, which marks a significant divergence in comparison to the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs again in December. The latter drags the USD to a one-week low and contributes to capping the USD/JPY pair. Traders now look to more delayed US macro data for a fresh impetus later during the North American session.
Japanese Yen bulls seem non-committed despite rising BoJ rate hike bets
- Reuters reported this Wednesday that the Bank of Japan, over the past week, has intentionally shifted messaging to highlight the inflationary risks of a persistently weak Japanese Yen, suggesting that a December rate hike remains a live option. The change followed a key meeting between Prime Minister Sanae Takaichi and BoJ Governor Kazuo Ueda last week, which appeared to remove immediate political objections to rate hikes from the new administration.
- Meanwhile, data from the BoJ showed that the Services Producer Price Index, which tracks the price companies charge each other for services, rose 2.7% in October from a year earlier. This marked a notable slowdown from a revised 3.1% increase recorded in the previous month, though it suggests that Japan was on the cusp of durably meeting its 2% inflation target. This backs the case for further BoJ policy tightening and boosts the JPY during the Asian session.
- The US Dollar (USD), on the other hand, slides to a one-week low in the aftermath of unimpressive US macro data released on Tuesday, which reaffirmed market expectations for another interest rate cut by the US Federal Reserve in December. Adding to this, Fed Governor Stephen Miran echoed the dovish view and said in a television interview on Tuesday that a deteriorating job market and the economy call for large interest rate cuts to get monetary policy to neutral.
- The prospect of lower US interest rates boosts investors’ appetite for riskier assets amid hopes for a peace deal between Russia and Ukraine. President Volodymyr Zelenskiy said on Tuesday that Ukraine is ready to advance a US-backed framework for ending the war with Russia. This might cap the safe-haven JPY as traders look to the delayed release of US Durable Goods Orders, along with the US Weekly Initial Jobless Claims, for a fresh impetus around the USD/JPY pair.
USD/JPY needs to surpass Asian session top, around 156.35 to back the case for further recovery
The USD/JPY pair now seems to have found acceptance below the 100-hour Simple Moving Average (SMA) and the 38.2% Fibonacci retracement level of the recent move up from the monthly low. Moreover, negative oscillators on hourly charts back the case for additional losses. However, technical indicators on the daily chart are holding in positive territory, suggesting that any further slide is more likely to find decent support near the 155.30 region, or the 50% retracement level. This is followed by the 155.00 psychological mark, which, if broken decisively, will be seen as a fresh trigger for bearish traders and pave the way for deeper losses.
On the flip side, any attempted recovery back above the 156.00 mark now seems to confront an immediate hurdle near the Asian session high, around the 156.35 region. Sustained strength beyond the latter could trigger a short-covering move and allow the USD/JPY pair to reclaim the 157.00 round figure. Some follow-through buying might then set the stage for additional gains toward the 157.45-157.50 intermediate hurdle en route to the 158.00 neighborhood, or the highest level since mid-January, touched last week.
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.
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