- USD/JPY starts the new week on a positive note, albeit lacking follow-through buying.
- Persistent geopolitical risks support the safe-haven yen and limit the pair’s gains.
- Diverging monetary policy expectations between the BoJ and the Fed also help keep bulls on the sidelines.
The USD/JPY pair attracts some buyers at lower levels on the first day of the new week, although it struggles to find acceptance above the 147.00 level and capitalize on the upward move. Prices give back a significant part of intraday gains and are currently trading with a slight positive bias, around the 146.75-146.80 region.
A former Bank of Japan (BoJ) board member, Makoto Sakurai, said that the central bank will not be able to raise rates again in 2024 and predicts a rate hike by March 2025, citing recent market turmoil and the low likelihood of a quick economic recovery. This adds to recent dovish comments by BoJ Deputy Governor Shinichi Uchida, who said that the central bank will not raise rates when markets are unstable, undermining the Japanese Yen (JPY) and lending some support to the USD/JPY pair.
Apart from this, a generally positive tone around the equity markets affects the safe-haven status of the JPY, which, together with a modest rebound in the US Dollar (USD), contributes to the bullish tone around the USD/JPY pair. Meanwhile, the BoJ’s summary of views from the July monetary policy meeting, released last week, indicated that some members see scope for further rate hikes and policy normalization. Moreover, geopolitical risks help limit deeper losses for the JPY and cap the USD/JPY pair.
In fact, the Israeli intelligence community believes that Iran has decided to directly attack Israel and could do so in the coming days in retaliation for the assassination of Hamas leader Ismail Haniyeh in Tehran in late July. In addition, US Defense Secretary Lloyd Austin told his Israeli counterpart Gallant in a call that he has ordered the USS Abraham Lincoln aircraft carrier strike group to speed up its transit to the Middle East and the USS Georgia guided missile submarine to head to the Central Command region.
This raises the risk of further escalation of geopolitical tensions in the Middle East. Apart from this,
Mounting bets on larger interest rate cuts by the Federal Reserve (Fed) in September are holding back USD bulls from placing aggressive bets. This, in turn, is helping to keep a lid on the USD/JPY pair amid relatively thin liquidity due to a holiday in Japan and the absence of any relevant market-moving economic data.
Traders also seem reluctant and might prefer to wait on the sidelines ahead of the release of US consumer inflation figures this week before opening fresh directional positions. The crucial CPI report will play a key role in influencing future Fed policy decisions, which, in turn, should provide a significant boost to the Dollar and the USD/JPY pair.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and foreign exchange control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has been pursuing ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing money to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus has caused the Yen to depreciate against its major currency peers. 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-high inflation. The Bank of Japan’s policy of keeping rates low has led to a widening spread with other currencies, dragging down the value of the Yen.
The weak yen and the surge in global energy prices have caused Japanese inflation to rise, exceeding the Bank of Japan’s 2% target. However, the Bank of Japan judges that a sustainable and stable achievement of the 2% target is still not in sight, so a sharp change in current monetary policy seems unlikely.
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.
