- The Japanese Yen continues to be underpinned by bets on more BoJ rate hikes.
- The narrowing US-Japan yield differential further benefits the lower-yielding JPY.
- The Fed’s hawkish pause underpins the USD and could lend support to USD/JPY.
The Japanese Yen (JPY) sticks to strong intraday gains through the Asian session on Thursday and remains close to over a one-month high touched against its American counterpart earlier this week. Investors now seem convinced that the Bank of Japan (BoJ) will hike interest rates further, which, in turn, is seen underpinning the JPY. Moreover, a fresh leg down in the US Treasury bond yields, resulting in a further narrowing of the US-Japan yield differential, turns out to be another factor lending support to the lower-yielding JPY.
That said, growing market concerns about the potential economic fallout from US President Donald Trump’s trade policies hold back the JPY bulls from placing aggressive bets. Moreover, the Federal Reserve’s (Fed) hawkish pause on Wednesday acts as a tailwind for the US Dollar (USD) and lends some support to the USD/JPY pair. Traders now look to the European Central Bank (ECB) meeting, which could elevate volatility and drive the safe-haven JPY. Apart from this, the Advance US Q4 GDP print should provide some impetus.
Japanese Yen bulls retain control amid hawkish BoJ expectations, sliding US bond yields
- Minutes of the December Bank of Japan meeting showed on Wednesday that board members discussed how to use estimates on the economy’s neutral interest rate to determine further hikes in borrowing costs.
- Former BoJ board member Makoto Sakurai said on Tuesday that broadening wage hikes, prospects of sustained price rises and solid economic growth give the central bank scope to continue raising rates steadily.
- The Federal Reserve, as was widely expected, decided to keep rates steady at the end of a two-day meeting on Wednesday and struck a hawkish stance, signaling no immediate plans for further rate reductions.
- In the post-meeting press conference, Fed Chair Jerome Powell said that we do not need to be in a hurry to adjust our policy stance and that monetary policy is well positioned for the challenges at hand.
- Powell’s remarks reaffirmed the notion that rates will remain higher for longer amid caution over US President Donald Trump’s protectionist policies, which could boost inflation and act as a tailwind for the US Dollar.
- The yield on the benchmark 10-year US government bond struggles to capitalize on the post-FOMC bounce from over a one-month trough amid the uncertainty over the Trump administration’s trade policies.
- The Asahi newspaper reported this Thursday that plans are being finalized for a meeting between Japan’s Prime Minister Shigeru Ishiba and US President Donald Trump in Washington on February 7.
- The European Central Bank’s policy decision later today might infuse some volatility in the financial markets. Apart from this, the Advance Q4 US GDP print should provide some impetus to the USD/JPY pair.
USD/JPY could aim to retest monthly low, around the 153.70 region touched on Monday
The emergence of fresh sellers near the 156.00 round figure and the subsequent fall below the 155.00 psychological mark confirms a breakdown through a multi-month-old ascending channel support. Moreover, oscillators on the daily chart have been gaining negative traction, suggesting that the path of least resistance for the USD/JPY pair remains to the downside. Hence, some follow-through weakness below the 154.00 mark, towards retesting a multi-week low around the 153.70 region touched on Monday, looks like a distinct possibility.
On the flip side, attempted recovery might now confront resistance near the 155.00 round figure ahead of the 155.35-155.40 region. Any further move up might still be seen as a selling opportunity and remain capped near the 156.00 mark. This is followed by the weekly top, around the 156.25 area, which should act as a key pivotal point. A sustained strength beyond the latter might trigger a fresh bout of a short-covering rally and lift the USD/JPY pair to the 156.70-156.75 region en route to the 157.00 round figure and the 157.60 horizontal barrier.
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.
