The Japanese Yen (JPY) continues to grapple against the US Dollar for the third consecutive day, hovering near the weekly low as the European session approaches on Friday. This decline is attributed to diminished expectations of the Bank of Japan (BoJ) ending negative interest rates, exacerbated by last week’s unexpected recession announcement for Japan’s economy. The prevailing risk-on environment further weakens the safe-haven appeal of the JPY.
Investors, however, are exercising caution following warnings from Japanese officials about potential market interventions to curb JPY weakness. Additionally, the US Dollar (USD) struggles to gain substantial traction, hindering any significant appreciation in the USD/JPY pair amid a lack of noteworthy macroeconomic data.
Key Factors Influencing the Japanese Yen:
Last week’s data revealing Japan’s unexpected entry into a technical recession in Q4 dealt a blow to hopes of the BoJ exiting its ultra-easy policy regime, contributing to the JPY’s decline.
The Eurozone’s better-than-expected flash Purchasing Managers’ Index (PMI) prints for February eased the downturn in business activity, adding pressure on the JPY by boosting investor sentiment.
Ongoing attacks on commercial vessels in the Red Sea by Yemen’s Iran-aligned Houthi rebels, despite US and UK strikes, raise the risk of military action, providing support to the JPY.
Japan’s Ministry of Finance and the BoJ have issued warnings, closely monitoring the exchange rate and expressing readiness to intervene to prevent further weakness in the domestic currency.
Global Economic Developments:
The recent Federal Open Market Committee (FOMC) meeting minutes and statements from influential Federal Reserve officials indicate a commitment to keeping interest rates higher for an extended period.
Fed Vice Chair Philip Jefferson expressed cautious optimism about progress on inflation, emphasizing a comprehensive approach to interest rate decisions based on the totality of data.
Philadelphia Fed President Patrick Harker suggested the central bank is approaching a point of cutting interest rates but remains uncertain about the specific timing.
Fed Governor Lisa Cook advocates for greater confidence in inflation converging to 2% before initiating interest rate cuts, while Governor Christopher Waller anticipates a possible rate cut later in the year, contingent on evidence of cooling inflation.
Market pricing, as per the CME FedWatch Tool, indicates a 30% chance of the Fed cutting interest rates in May, down from over 80% a month ago.
Positive signs in the US labor market, reflected in declining unemployment insurance benefit applications, support elevated US Treasury bond yields, favoring USD bulls and suggesting potential upward movement for the USD/JPY pair.
Technical Analysis and Market Outlook:
From a technical standpoint, a pullback in USD/JPY may find support near the psychological 150.00 mark, followed by the weekly low around the 149.70-149.65 region.
A breach of these levels could lead to further downside, targeting the 149.35-149.30 horizontal support and potentially reaching the 149.00 mark.
On the upside, sustained strength beyond the 150.85-150.90 area, last week’s multi-month top, may encourage bullish activity.
With daily chart oscillators comfortably in positive territory and not yet in the overbought zone, a move towards the 151.45 hurdle and potentially to the 152.00 neighborhood is plausible, retesting a multi-decade peak set in October 2022 and revisited in November 2023.
