During the early European session on Tuesday, the Japanese Yen (JPY) extended its weakening trend, reaching a fresh 34-year low against the US Dollar (USD). This decline was spurred by the Bank of Japan‘s (BoJ) dovish outlook, as the central bank refrained from providing guidance on future policy steps following the cessation of negative interest rates in March.
The absence of clear policy direction, coupled with indications of a shift towards a more discretionary approach focusing less on inflation, further undermined the JPY. Additionally, ongoing USD buying pressure contributed to lifting the USD/JPY pair to levels just above the mid-154.00s.
US macroeconomic data indicated persistent inflation and a resilient economy, prompting investors to delay expectations for the Federal Reserve’s (Fed) first interest rate cut from June to September. This delay suggests that the interest rate differential between the US and Japan will persist, potentially driving capital flows away from the JPY and supporting further appreciation of the USD/JPY pair in the near term.
Despite warnings from Japanese authorities regarding intervention to support the JPY, bears in the market may remain cautious. The escalating Middle East crisis may also limit losses for the JPY and act as a buffer for the currency pair.
In other market developments, US data revealed a robust retail sector performance in March, offsetting concerns raised by a weaker-than-expected Empire State Manufacturing Index for April. The discrepancy in interest rate projections between the Fed and market expectations bolstered the US Dollar, maintaining upward pressure on the USD/JPY pair.
Japanese officials, including Finance Minister Shunichi Suzuki and Chief Cabinet Secretary Yoshimasa Hayashi, expressed vigilance over FX movements but provided little relief to JPY bulls. The outlook for Fed rate policy and geopolitical tensions remain key factors influencing investor sentiment and the direction of the USD/JPY pair.
Looking ahead, market participants await US macroeconomic indicators and speeches from influential Fed members for potential market-moving cues. From a technical standpoint, while bullish momentum persists for the USD/JPY pair, caution is warranted due to overbought conditions signaled by the Relative Strength Index (RSI) on the daily chart. Any pullback is likely to find support near key levels, while further upside beyond the mid-154.00s could drive the pair towards the psychological resistance at 155.00.
