- The Japanese Yen continues to be undermined by the BoJ’s cautious stance and the risk-on mood.
- Intervention fears limit further JPY losses and cap the USD/JPY pair amid a modest USD weakness.
- The US PCE Price Index keeps a June rate cut by the Fed on the table and weighs on the Greenback.
The Japanese Yen (JPY) kicks off the new week on a softer tone, albeit lacking follow-through and remains confined in a familiar range held over the past two weeks or so against its American counterpart. The Bank of Japan’s (BoJ) cautious approach and the uncertain outlook for future rate hikes, along with the risk-on mood, continues to undermine the safe-haven JPY. That said, signs of a potential government intervention to address any excessive falls in the domestic currency might hold back the JPY bears from positioning for any meaningful depreciating move.
The US Dollar (USD), on the other hand, struggles to lure buyers amid expectations that the Federal Reserve (Fed) will begin its rate-cutting cycle in June, bolstered by the lack of a surprise from the US Personal Consumption Expenditures (PCE) Price Index. This might contribute to keeping a lid on further gains for the USD/JPY pair. Traders now look to the release of important US macro data scheduled at the beginning of a new month, starting with the ISM Manufacturing PMI on Monday for some impetus ahead of the Nonfarm Payrolls (NFP) on Friday.
- The Bank of Japan struck a dovish tone at the end of the March meeting and stopped short of offering any guidance about future policy steps or the pace of policy normalization, which, in turn, is seen weighing on the Japanese Yen.
- An official survey showed that China’s manufacturing activity expanded for the first time in six months in March, providing an additional boost to investors’ confidence and contributing to the offered tone surrounding the safe-haven JPY.
- The National Bureau of Statistics reported on Sunday that China’s Manufacturing PMI rose to 50.8 from 49.1 in February, while the gauge for the services sector climbed to 53, suggesting that the world’s second-largest economy is stabilizing.
- The BoJ’s Tankan survey revealed on Monday that business optimism among large manufacturers eased to 11 during the first quarter from 12 in the last survey, while the index for large nonmanufacturers rose to 34 from the 30 previous.
- The au Jibun Bank Japan Manufacturing PMI contracted for the 10th consecutive month and was finalized at 48.2 in March, marking the highest level since November and indicating that the worst of the weakness had passed.
- Japan’s Finance Minister Shunichi Suzuki said on Monday there were speculative moves behind the recent JPY fall, suggesting that authorities remained ready to intervene in the market to address any excessive falls in the domestic currency.
- Japanese monetary authorities reportedly made a last-minute decision to bring forward an emergency meeting to Wednesday, which was originally scheduled for Thursday, to maximise the impact of arresting sharp JPY decline.
- The US Bureau of Economic Analysis reported on Friday that the Personal Consumption Expenditures (PCE) Price Index rose 0.3% in February, slightly lower than the 0.4% estimated, while the yearly rate edged up to 2.5% from the 2.4%.
- The core PCE Price Index, which excludes volatile food and energy prices, rose 2.8% on a yearly basis as compared to January’s upwardly revised reading of 2.9%, keeping a June interest rate cut from the Federal Reserve on the table.
- This, in turn, drags the US Dollar away from its highest level since February 16 touched last week and might further hold back traders from positioning for any meaningful near-term appreciating move for the USD/JPY pair.
- Traders now look forward to important US macro data scheduled for release at the start of a new month, starting with the ISM Manufacturing PMI on Monday for some impetus ahead of the key monthly jobs report on Friday.
From a technical perspective, the range-bound price action witnessed over the past two weeks or so might still be categorized as a bullish consolidation phase against the backdrop of the recent rally from the March swing low. Moreover, oscillators on the daily chart are holding comfortably in the positive territory and have also eased from overbought conditions, suggesting that the path of least resistance for the USD/JPY pair is to the upside. That said, it will still be prudent to wait for a move beyond a multi-decade high, around the 152.00 mark set last week, before positioning for any further gains.
On the flip side, the 151.00 round figure now seems to have emerged as an immediate strong support. Some follow-through selling below the 150.85-150.80 horizontal resistance breakpoint could expose the next relevant support near the 150.25 area. This is closely followed by the 150.00 psychological mark, which, if broken decisively, might turn the USD/JPY pair vulnerable to accelerate the corrective decline further towards the 149.35-149.30 region en route to the 149.00 mark.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
