- The Japanese yen could limit its fall as traders remain on alert for possible intervention by authorities.
- BoJ data showed authorities may have spent between ¥3.37 trillion and ¥3.57 trillion on Thursday to support the JPY.
- Fed Chairman Jerome Powell said inflation is on track to sustainably meet the Fed’s target.
The Japanese Yen (JPY) extended its losses on Tuesday with traders remaining on alert after the currency soared around 2% last week on alleged intervention by Japanese authorities. According to data released by the Bank of Japan (BoJ) on Friday, it is estimated that Japanese authorities may have spent between ¥3.37 trillion and ¥3.57 trillion on Thursday to stem the rapid depreciation of the JPY, Reuters reported.
The US Dollar (USD) is strengthening amid rising risk aversion triggered by the assassination attempt on former US President Donald Trump on Saturday. However, slowing US inflation has strengthened bets on a Federal Reserve rate cut in September, which could limit the dollar’s upside.
According to the CME Group’s FedWatch tool, markets now indicate an 85.7% probability of a 25 basis point rate cut at the Fed’s September meeting, up from 71.0% a week ago.
Daily Market Wrap: Japanese Yen falls despite threats of intervention
- Fed Chair Jerome Powell said Monday that the three U.S. inflation readings this year “increase some confidence” that inflation is on track to sustainably meet the Fed’s target, suggesting a shift toward interest rate cuts may not be far off.
- San Francisco Fed President Mary Daly said inflation is cooling in a way that reinforces confidence that it is on track to 2%. However, Daly added that more information is needed before a rate decision is made.
- US President Joe Biden addressed the nation from the White House on Monday, where he condemned all political violence and called for unity, according to CNBC. Biden also declared that “it’s time to calm down” and pointed not only to the weekend attack on Trump, but also the possibility of election-year violence on multiple fronts.
- ING FX analyst Francesco Pesole notes that Japan’s Ministry of Finance has adjusted its FX intervention strategy. Following the release of soft US CPI on Friday, the USD/JPY pair fell by about 2%, a larger drop compared to other USD pairs. The surge in JPY futures volumes seems to align with indications of FX intervention.
- UBS FX strategists note that speculative investors are holding short positions near record levels in the Yen. They suggest that if US economic data continues to signal a soft landing, USD/JPY could experience periods of pullbacks.
- BBH FX strategists note that recent weakness in US data poses challenges to their view that the backdrop of sustained inflation and strong US growth remains largely intact. They point to growing concerns among Federal Reserve officials about weaknesses in the labor market.
- Japanese Chief Cabinet Secretary Yoshimasa Hayashi has said he is ready to employ all available measures regarding the foreign exchange market. Hayashi said the Bank of Japan (BoJ) would determine the details of monetary policy. He expects the BoJ to implement appropriate measures to sustainably and steadily achieve the 2% price target, Reuters reported on Friday.
- On Friday, Japanese Finance Minister Shunichi Suzuki stressed that rapid movements in the foreign exchange (FX) market are undesirable. Suzuki refrained from commenting on intervention in the FX market and declined to address media reports about Japan’s exchange rate checks, Reuters reported.
Technical Analysis: USD/JPY breaks above 158.50
USD/JPY is trading around 158.70 on Tuesday. The daily chart analysis indicates a strengthening of the bullish bias as the pair climbs towards the lower boundary of an ascending channel pattern. The 14-day Relative Strength Index (RSI) is also slightly below the 50 level. A further rise could strengthen the uptrend.
Immediate resistance is seen around the nine-day exponential moving average (EMA) at 159.46, followed by the lower boundary of the ascending channel around 160.30. A return to trading within the ascending channel would likely improve sentiment for the USD/JPY pair, with a potential target towards the upper boundary of the ascending channel near 163.70.
On the downside, the USD/JPY pair could find key support around the psychological level of 158.00. A break below this level could put pressure on the pair to navigate the region around the June low at 154.55.
USD/JPY: Daily Chart
Inflation FAQs
Inflation measures the rise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month and year-on-year. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on and is the target level for central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change month-on-month and year-on-year. The core CPI is the target for central banks as it excludes the volatility of food and fuel. When the core CPI exceeds 2%, interest rates typically rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.
Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often still buy Gold for its safe haven properties during times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or putting the money in a cash deposit account. Conversely, lower inflation tends to be positive for Gold as it lowers interest rates, making the shiny metal a more viable investment alternative.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
