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The Japanese Yen remains on the defensive against the Dollar and seems vulnerable to a new fall

  • The Japanese Yen advances slightly thanks to a stronger than expected Tokyo CPI, although it lacks continuation.
  • Uncertainty over the BoJ's monetary policy is holding back Yen bulls from opening new positions.
  • Investors also seem reluctant and prefer to wait for US macroeconomic data.

The Japanese Yen (JPY) remains on the defensive against the US Dollar (USD) at the start of the European session on Tuesday, amid uncertainty over the Bank of Japan's (BoJ) plans to exit the interest rate regime negative. That said, the rise in the Tokyo CPI released today has revived expectations of an imminent change in monetary policy. This, coupled with speculation that Japanese authorities will intervene to prop up the domestic currency and cautious market sentiment acts as a tailwind for the safe-haven JPY.

Elsewhere, the US dollar continues to struggle to gain ground amid growing acceptance that the Federal Reserve (Fed) will begin cutting interest rates in June. This helps limit the rise of the US/JPY pair. However, investors are reluctant and prefer to wait to see the Fed's path. Therefore, attention remains focused on Fed Chairman Jerome Powell's two-day testimony before Congress, along with important data US macroeconomic data scheduled for the beginning of a new month.

Daily Market Drivers Summary: Japanese Yen Lacks Firm Intraday Direction Amid Mixed Fundamental Signals

  • The rise in the Tokyo CPI revives rumors that the Bank of Japan will exit the negative interest rate regime next month and provides a modest boost to the Japanese Yen.
  • The Statistics Bureau reported that consumer inflation in the Japanese capital rebounded to 2.5% year-on-year in February, from 1.6% the previous month, its lowest level in 22 months.
  • Meanwhile, core inflation, which excludes energy and fresh food, fell to 3.1% last month from 3.3% in January, although it remained above the 2% annual target set by the BoJ.
  • Persistent inflation, coupled with expectations of another major wage hike this year, should allow the BoJ to end its ultra-loose monetary policy sooner rather than later.
  • Japan's Jibun Bank Services PMI stood at 52.9 in February, up from a flash estimate of 52.5 and 53.1 recorded the previous month.
  • Japanese Economy Minister Yoshitaka Shindo denied information that appeared in the media over the weekend, according to which Japan was considering ending deflation due to rising prices.
  • Dollar bulls remain on the defensive amid growing expectations that the Federal Reserve will begin cutting interest rates at the June policy meeting.
  • Atlanta Fed President Raphael Bostic does not foresee consecutive rate cuts when they begin and continues to expect only two 25 basis point cuts by the end of this year.
  • Bostic further stated that inflation is on track to return to the 2% target, but that he needs to see more progress and gain confidence in disinflation before voting to cut official interest rates.
  • Investors now seem reluctant and prefer to wait on the sidelines awaiting the important US macroeconomic releases this week, starting with the ISM services PMI this Tuesday.
  • Attention, however, remains focused on Fed Chairman Jerome Powell's semi-annual congressional testimony on Wednesday and Thursday, and on Friday's US nonfarm payrolls (NFP).

Technical analysis: USD/JPY bulls are in control as long as they are above the psychological level of 150.00

From a technical perspective, the USD/JPY pair has been oscillating in a familiar range for the past three weeks or so. This constitutes the formation of a rectangle on short-term charts. Against the backdrop of a rally from the December 2023 low, this could still be categorized as a bullish consolidation phase. Furthermore, the daily chart oscillators remain comfortably in positive territory and suggest that the path of least resistance for the pair is to the upside.

That said, it would be prudent to wait for a sustained break above the aforementioned range, around 150.75-150.85, which coincides with the yearly high reached in February, before positioning for further rises. The USD/JPY pair could then break above the 151.00 level and accelerate momentum towards the intermediate resistance at 151.45 on the way towards the 152.00 region, or a multi-decade high established in October 2022 and retested in November 2023.

On the other hand, the psychological level of 150.00 seems to protect the immediate decline. Any further pullback is likely to attract new buyers near last week's low, around the 149.20 area. Below is the round level of 149.00, which if broken decisively could change the bias in favor of the bears. This could drag the USD/JPY pair towards the 148.30 support en route to the 148.00 level and the 100-day SMA, currently near the 147.80 region.

Frequently Asked Questions about the Japanese Yen

What factors determine the price of the Japanese Yen?

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is determined broadly by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the differential between the yields of Japanese and US bonds or the risk sentiment among traders, among other factors.

How do decisions by the Bank of Japan affect the Japanese Yen?

One of the mandates of the Bank of Japan is currency control, so its movements are key for the Yen. The BoJ has intervened directly in currency markets on occasion, usually to lower the value of the Yen, although it often refrains from doing so due to the political concerns of its major trading partners. The BoJ's current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the depreciation of the Yen against its main currency pairs. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat decades-old levels of inflation.

How does the spread between Japanese bond yields and US bond yields affect the Japanese Yen?

The Bank of Japan's ultra-loose monetary policy stance has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This favors the widening of the spread between US and Japanese 10-year bonds, which favors the Dollar against the Yen.

How does general risk sentiment influence the Japanese Yen?

The Japanese Yen is often considered 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. In turbulent times, the Yen is likely to appreciate against other currencies that are considered riskier to invest in.

Source: Fx Street

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