- USD/JPY regains positive traction on Tuesday, although the rally lacks bullish conviction.
- The positive risk tone weighs on the safe-haven Japanese Yen and offers some support to the pair.
- Expectations of further Fed rate cuts weigh on USD and should limit gains ahead of US CPI.
The USD/JPY pair attracts some buying at lower levels during the Asian session on Wednesday and climbs back above the 147.00 mark in the last hour, reversing the previous day’s modest decline. However, spot prices remain confined in a familiar range held for the past week or so as traders look forward to the US consumer inflation figures before positioning for the next directional move.
The much-awaited US Consumer Price Index (CPI) report will be released later today and will be looked upon for clues regarding the Federal Reserve’s (Fed) rate cutting path. This, in turn, will play a key role in influencing USD demand in the near term and provide a significant boost to the USD/JPY pair. Looking ahead to key data risk, the market optimism is weakening the safe-haven Japanese Yen (JPY) and acting as a tailwind for the USD/JPY pair.
Meanwhile, data released on Tuesday showed that the US Producer Price Index (PPI) rose less than expected in July, supporting prospects for deeper rate cuts by the Federal Reserve (Fed) in September. This, in turn, dragged US Treasury bond yields lower across the board and the US Dollar (USD) to a more than one-week low. Apart from this, expectations of the Bank of Japan (BoJ) raising rates again in 2024 are helping limit JPY losses and could cap the USD/JPY pair.
Even from a technical perspective, the recent range-bound price action points to indecision among traders. This makes it all the more prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out near the 141.70-141.65 region, or the lowest level since early January touched last week.
The feeling of risk FAQs
In the world of financial jargon, the two terms “risk-on” and “risk-off” refer to the level of risk that investors are willing to bear over the reference period. In a “risk-on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk-off” market, investors start to “play it safe” because they are worried about the future and therefore buy less risky assets that are more certain to provide a return, even if relatively modest.
Typically, during periods of “risk appetite”, stock markets rise, and most commodities – except gold – also appreciate as they benefit from positive growth prospects. Currencies of countries that are major commodity exporters strengthen due to increased demand, and cryptocurrencies rise. In a “risk-off” market, bonds rise – especially major government bonds –, gold shines, and safe haven currencies such as the Japanese Yen, Swiss Franc and US Dollar benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and minor currencies such as the Ruble (RUB) and South African Rand (ZAR) tend to rise in markets where there is “risk appetite”. This is because the economies of these currencies are highly dependent on commodity exports for growth, and these tend to rise in price during periods of “risk appetite”. This is because investors anticipate higher demand for commodities in the future due to increased economic activity.
The major currencies that tend to rise during periods of “risk aversion” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The Dollar, because it is the world’s reserve currency and because in times of crisis investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. The Yen, because of increased demand for Japanese government bonds, since a large proportion are held by domestic investors who are unlikely to part with them, even in a crisis. The Swiss Franc, because strict Swiss banking legislation offers investors greater capital protection.
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.
