Japanese Yen bears turn cautious; look to FOMC/BoJ meetings before placing fresh bets
- 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) remains on the back foot against its American counterpart during the Asian session on Tuesday amid the growing conviction that the Bank of Japan (BoJ) is likely to keep interest rates unchanged this week. Furthermore, the recent surge in the US Treasury bond yields, bolstered by expectations for a hawkish interest rate cut by the Federal Reserve (Fed), is seen as another factor weighing on the lower-yielding JPY.
Apart from this, a generally positive risk tone undermines demand for the safe-haven JPY, though a modest US Dollar (USD) downtick caps the upside for the USD/JPY pair. Traders also seem reluctant to place aggressive directional bets and might opt to move to the sidelines ahead of 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.
Japanese Yen bears retain control amid expectations that the BoJ will maintain the status quo
- 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 seems poised to reclaim the 155.00 psychological mark while above the 61.8% Fibo. level
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
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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