Japanese Yen retreats further from multi-month high set against USD on Tuesday

The Japanese Yen drifts lower against the USD for the second consecutive day on Wednesday.

Concerns about Trump’s trade tariffs and a positive risk tone undermine the safe-haven JPY.

The divergent BoJ-Fed policy expectations should limit any meaningful downside for the JPY. 

The Japanese Yen (JPY) continues losing ground against its American counterpart for the second straight day on Wednesday and moves away from the highest level since October touched the previous day. Concerns that US President Donald Trump could impose fresh tariffs on Japan and a slight

 improvement in the global risk sentiment turn out to be key factors undermining the safe-haven JPY. Any meaningful JPY depreciation, however, still seems elusive in the wake of hawkish Bank of Japan (BoJ) expectations.

Data released earlier today showed that Japan's annual wholesale inflation – Producer Price Index (PPI) – rose 4.0% in February, underscoring broadening inflationary pressure. Adding to this, hopes that bumper wage hikes seen last year will continue this year remain supportive of the growing market acceptance that the BoJ will hike interest rates further. This, along with the recent sharp narrowing of rate differentials between Japan and other countries should act as a tailwind for the lower-yielding JPY and help limit losses. 

Apart from this, persistent worries about the potential economic fallout from Trump's trade policies and a global trade war should offer support to the JPY. The US Dollar (USD), on the other hand, languishes near a multi-month low amid bets that a tariff-driven slowdown in the US would force the Federal Reserve (Fed) to lower borrowing costs multiple times this year. This should further contribute to capping the upside for the USD/JPY pair as traders keenly await the release of the US consumer inflation figures. 

Japanese Yen is pressured by rising trade tensions; downside seems cushioned amid BoJ rate hike bets 

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• US President Donald Trump on Tuesday threatened a 50% tariff on steel and aluminum from Canada, though he reversed course after Ontario paused surcharges on electricity to US customers. Earlier, Japan’s Trade Minister Yoji Muto said that he has failed to win assurances from US officials that Japan will be exempt from steel tariffs, which take effect on Wednesday.

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• The lower house of Congress narrowly passed a Republican spending bill that would avoid a government shutdown on March 14 and keep the US government open until September. The bill now heads to the Senate and will need the support of at least seven Democrats to overcome the 60-vote filibuster threshold before being sent to Trump for his signature. 

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• Data published by the Bank of Japan this Wednesday showed that the Producer Price Index (PPI) slowed to a 4.0% year-on-year rate in February from 4.2% in the previous month. Given that consumer inflation in Japan has exceeded the central bank's target for nearly three years, the latest PPI supports prospects for further monetary policy tightening by the BoJ. 

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• The yield on the benchmark 10-year Japanese government bond remains close to its highest level since October 2008 touched on Monday. In contrast, the 10-year US Treasury bond yield remains close to a multi-month low touched earlier this March amid concerns about a tariff-driven US economic slowdown and bets for more rate cuts by the Federal Reserve. 

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• In fact, market participants are now pricing in about three rate cuts of 25 basis points each by the Fed by the end of this year. The bets were lifted by Friday's weaker US Nonfarm Payrolls report, which pointed to signs of a cooling US labor market. This keeps the US Dollar depressed near its lowest level since mid-October and caps the upside for the USD/JPY pair. 

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• Traders also seem reluctant and opt to wait for the release of the US consumer inflation figures before positioning for the next leg of a directional move. The crucial Consumer Price Index (CPI) report will play a key role in influencing expectations about the Fed's rate-cut path, which, in turn, will drive USD demand and provide a fresh impetus to the currency pair. 

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USD/JPY might attract fresh sellers and remain capped below the 148.60-148.70 support breakpoint

From a technical perspective, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside and any further move up is likely to remain capped near the 148.60-148.70 horizontal support breakpoint. However, some follow-through buying, leading to a subsequent strength beyond the 149.00 mark, might trigger a short-covering rally towards the 149.70-149.75 intermediate resistance en route to the 150.00 psychological mark.

On the flip side, the 147.25 area now seems to act as immediate support ahead of the 147.00 round figure and the 146.55-146.50 zone, or a multi-month trough touched on Tuesday. A break below the latter might turn the USD/JPY pair vulnerable to accelerate the fall toward the 146.00 round figure. The downward trajectory could eventually drag spot prices to the 145.00 psychological mark with some intermediate support near the 145.40-145.35 zone.