The Japanese Yen (JPY) has been the center of attention recently, with speculations about a possible government intervention in the markets by Japanese authorities. This intervention is seen as a key factor lending some support to the JPY, which has been hovering at a fresh 34-year low. However, despite the possibility of intervention, any significant appreciating move by the JPY still seems elusive. This is due to the widening interest rate gap between the US and Japan, with the Federal Reserve (Fed) expected to delay cutting interest rates amid sticky inflation. The Bank of Japan (BoJ) has also indicated that it is in no rush to normalize its policy, further dampening hopes for a strong rally in the JPY.
Traders are treading cautiously ahead of the key US macro data releases and the upcoming BoJ meeting later in the week. This includes the Advance US Q1 GDP print, the US Personal Consumption Expenditures (PCE) Price Index, and the crucial decision by the BoJ. Economic indicators from Japan, such as the PMI data, showed some improvement in overall business activity at the beginning of the second quarter. Despite this, the JPY bulls were not particularly impressed, indicating a certain level of skepticism in the market sentiment.
The recent hawkish stance taken by the FOMC members has kept the US Dollar (USD) strong, with expectations of a delayed rate cut by the Federal Reserve to September. This has led to a downsizing of the number of expected rate cuts for the year, which has further bolstered the USD against the JPY. Investors are closely watching the developments in the US, especially in light of the upcoming policy decisions by the BoJ and the potential impact on the USD/JPY pair.
From a technical perspective, the Relative Strength Index (RSI) is indicating overbought conditions for the USD/JPY pair on the daily chart. This has hindered any significant upward movement in the pair, with potential resistance levels around the 154.85 region and the psychological barrier of 155.00. On the downside, dip-buyers are likely to be attracted near the 154.35-154.30 region, limiting the downside risk. However, a break below the 153.00 mark could trigger further selling pressure, pushing the pair towards the 152.50 level.
The Federal Reserve (Fed) plays a crucial role in shaping US monetary policy, with a primary focus on achieving price stability and fostering full employment. The Fed adjusts interest rates to control inflation and spur economic growth. When inflation is above the 2% target or unemployment is high, the Fed may raise interest rates to curb inflation. This leads to a stronger USD as international investors find the US more attractive. Conversely, when inflation is low or unemployment is high, the Fed may lower interest rates to stimulate borrowing and spending, which can weaken the Greenback.
In extreme situations, the Fed may resort to a policy called Quantitative Easing (QE) to inject liquidity into the financial system. QE involves the Fed purchasing high-grade bonds from financial institutions, thereby increasing the flow of credit. This policy was notably used during the Great Financial Crisis in 2008 to stabilize the economy. QE typically weakens the US Dollar as it floods the market with excess currency. Conversely, Quantitative Tightening (QT) is the reverse process where the Fed reduces its bond purchases, which can have a positive effect on the value of the USD.
The Japanese Yen’s performance is influenced by a multitude of factors, including government intervention, economic indicators, market sentiments, and monetary policies. Traders and investors need to stay vigilant and adapt to the changing landscape of the global economy to navigate the fluctuations in the USD/JPY pair effectively.