- The Japanese Yen falls to multi-month lows in reaction to the BoJ's moderate rise on Tuesday.
- The Fed's dovish expectations underpin the dollar and offer additional support to the USD/JPY pair.
- Fears of intervention could limit the pair ahead of the FOMC's crucial monetary policy decision.
The Japanese Yen (JPY) remains under heavy selling pressure for the seventh consecutive day on Wednesday and falls to a four-month low against its US counterpart at the start of the European session. The fact that the Bank of Japan (BoJ) indicated that financial conditions would remain accommodative and refrained from offering any guidance on future monetary policy measures, or the pace of monetary policy normalization, continues to weigh on the Yen. Apart from this, the prevailing risk-on sentiment turns out to be another factor weighing on the safe-haven JPY.
On the other hand, the US dollar (USD) remains near the two-week highs reached on Tuesday, amid growing acceptance that the Federal Reserve (Fed) will maintain its higher interest rate policy for longer to reduce inflation. This provides additional momentum to the USD/JPY pair and contributes to the ongoing positive move above the 151.50 level. Meanwhile, the sharp depreciation of the Yen could lead to some intervention by Japanese authorities and limit the pair's gains, as investors eagerly await the outcome of the FOMC monetary policy meeting.
Daily Market Drivers Roundup: Yen Bears Seem Unstoppable Amid BoJ, Fed's Diverging Policy Outlook
- The lack of forecasts for further tightening of the Bank of Japan's monetary policy disappointed investors and continues to weigh on the Japanese Yen, which on Wednesday reached its lowest level since November 2023 against the US dollar.
- On Tuesday, the BoJ, in a historic move, decided to end its negative interest rate policy and announced its first rate hike since 2007, although it pledged to maintain accommodative monetary conditions for the time being.
- The BoJ indicated it will reduce purchases of commercial paper and corporate bonds, although it will continue to buy Japanese government debt and intervene when necessary if yields rise too much, too quickly.
- Strong U.S. consumption and inflation figures fueled speculation that the Federal Reserve could shift its guidance to two 25 basis point rate cuts in 2024, rather than the three previously forecast.
- Therefore, attention will remain focused on the outcome of the expected two-day FOMC meeting and updated economic projections, including the so-called “dot plot”, for new clues on the future path of rate cuts.
- Meanwhile, Fed expectations continue to support elevated US Treasury yields and favor USD bulls, although intervention fears could limit JPY losses and cap the pair's upside.
Technical Analysis: USD/JPY Could Prolong Appreciation Move and Challenge Multi-Decade High
From a technical point of view, the recent strong rebound from the vicinity of the all-important 200-day SMA and a subsequent move above the 151.00 level could be considered a new trigger for the bulls. Furthermore, the oscillators on the daily chart have been gaining positive traction and are still far from being in the overbought territory, validating the constructive near-term setup for the USD/JPY pair. Therefore, a move towards the 152.00 area, or towards the multi-decade high reached in October 2022, is possible.
On the opposite side, any corrective decline appears to attract new buyers and is more likely to remain capped near the strong breakout point of the 150.80 horizontal resistance now turned support. However, a sustained break below that level could trigger some technical selling and drag the USD/JPY pair back towards the psychological level of 150.00. The next relevant support lies at the 149.50 area, which if broken decisively, could change the bias in favor of the bears and pave the way for additional losses.
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
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.
