Yen Stalls As US Dollar Strengthens Amidst Rate Cut Speculation

The Japanese Yen (JPY) faced a setback on Thursday while the US Dollar (USD) made gains, bolstered by higher US Treasury yields. However, the prospect of a potential interest rate cut by the US Federal Reserve (Fed) in September may temper the Greenback’s ascent and the USD/JPY pair’s upward momentum. Investors are keenly awaiting the release of crucial US employment data on Friday, including Average Hourly Earnings and Nonfarm Payrolls.

Japanese bond yields, after reaching recent highs, experienced a retreat, with the benchmark 10-year government bond yield dropping below 1% for the first time in two weeks. Nevertheless, Japan’s real wages witnessed a decline for the 25th consecutive month in April, exacerbating the challenge for the Bank of Japan (BoJ) in normalizing its policy.

Amidst these developments, the US Dollar Index (DXY) faced obstacles following mixed economic data releases in the United States (US), fueling speculation of potential interest rate cuts by the Fed. Notably, the probability of a Fed rate cut in September by at least 25 basis points surged to nearly 70.0%, as indicated by the CME FedWatch Tool.

Bank of Japan (BoJ) Governor Kazuo Ueda, in remarks to parliament, noted that inflation expectations are gradually rising but have yet to reach the target of 2%. Ueda emphasized the need to reduce bond purchases as the BoJ considers exiting its massive monetary stimulus. Additionally, BoJ board member Toyoaki Nakamura underscored the importance of maintaining current policies given the weakness in households’ purchasing power.

In economic indicators, the ISM US Services PMI in May reached its highest level in nine months, surpassing forecasts. Conversely, the ADP US Employment Change report indicated a slowdown in job additions. In Japan, the Jibun Bank Japan Services PMI for May, while revised higher, signaled softer growth compared to April.

On the technical front, USD/JPY traded around 155.60, exhibiting a weakening bullish bias as it broke below the lower boundary of a symmetrical triangle pattern. The 14-day Relative Strength Index (RSI) suggests potential for further decline, with immediate support at the psychological level of 156.00 and further support at the 50-day Exponential Moving Average (EMA). Conversely, a return to the symmetrical triangle pattern could reinforce the bullish sentiment, with key resistance levels at the upper boundary of the pattern and the psychological barrier of 157.00.