Japanese Yen gains positive traction against USD, upside potential seems limited
- The Japanese Yen strengthens against the USD, though it lacks bullish conviction amid BoJ uncertainty.
- The upbeat market mood and elevated US bond yield might contribute to capping the lower-yielding JPY.
- Traders look at Thursday's US macro data and the Fed speaks ahead of Japan’s National CPI on Friday.
The Japanese Yen (JPY) edges higher against its American counterpart during the Asian session on Thursday and drags the USD/JPY pair away from the weekly top touched the previous day. Any meaningful JPY appreciation, however, seems elusive in the wake of the uncertainty tied to the Bank of Japan’s (BoJ) pace and the timing of further interest rate hikes. Adding to this, a generally positive risk tone should contribute to capping gains for the safe-haven JPY.
Meanwhile, expectations that the Federal Reserve (Fed) may slow its path of rate cuts, amid concerns that US President-elect Trump's proposed policies could reignite inflation, remain supportive of elevated US Treasury bond yields. This assists the US Dollar (USD) to stand firm near the year-to-date peak and should limit losses for the USD/JPY pair. Traders might also opt to wait for the release of Japan's National Core Consumer Price Index (CPI) on Friday.
Japanese Yen might struggle to gain any meaningful traction amid a bearish fundamental backdrop
- Bank of Japan Governor Kazuo Ueda earlier this week left markets guessing as to how soon and at what pace could the central bank tighten its monetary policy.
- Investors are pricing in an even chance of a 25-basis-point rate hike and an on-hold decision at the final BoJ policy meeting of this year on December 18-19.
- According to mediate reports, the economic package proposed by Japanese Economic Revitalisation Minister Akazawa is expected to be around ¥21.9 trillion.
- Comments from Russian and US officials eased market concerns about the onset of a nuclear war, denting demand for traditional safe-haven currencies.
- US President-elect Donald Trump's proposed policies could potentially stoke inflation and slow the path of interest rate cuts from the Federal Reserve.
- Furthermore, Fed policymakers' cautious remarks on further policy easing remain supportive of rising US Treasury bond yields and a bullish US Dollar.
- Fed Governors member Lisa Cook noted on Wednesday that the central bank might get forced into a pause on interest rate cuts if inflation progress slows down.
- Separately, Fed Governor Michelle Bowman said that the progress on inflation appears to have stalled and that the central bank should pursue a cautious approach.
- Boston Fed President Susan Collins said that more rate cuts are needed, but policymakers should proceed carefully to avoid moving too quickly or too slowly.
- Traders now look to BoJ Governor Kazuo Ueda's appearance for some impetus ahead of speeches from a slew of influential FOMC members later this Thursday.
- Meanwhile, the US economic docket features the release of Weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and Existing Home Sales data.
- The focus, however, remains on Japan's National Core Consumer Price Index (CPI), which will be among the factors that the BOJ will scrutinize at its next meeting.
USD/JPY technical setup supports prospects for the emergence of dip-buying at lower levels
From a technical perspective, the USD/JPY pair has been showing some resilience below the 100-period Simple Moving Average (SMA) on the 4-hour chart. Moreover, oscillators on the daily chart are holding comfortably in positive territory, suggesting that any subsequent slide might still be seen as a buying opportunity near the 154.65-154.60 region. This should help limit the downside near the 154.00 mark (200-period SMA). The said support should act as a key pivotal point, which if broken might expose the weekly swing low, around the 153.25 area.
On the flip side, the Asian session peak, around the 155.40 area, now seems to act as an immediate hurdle, above which the USD/JPY pair could make a fresh attempt to reclaim the 156.00 mark. Some follow-through buying could lift spot prices towards retesting the multi-month top, around the 156.75 region touched last Friday.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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