The Japanese Yen (JPY) sustained its downward spiral for the fourth consecutive session on Wednesday, with the USD/JPY pair gaining traction as investors favored the US Dollar (USD) ahead of key events in the financial markets.
Investors’ preference for the US Dollar was notably reinforced by anticipation surrounding the Federal Reserve’s (Fed) forthcoming decision and the imminent release of US inflation data for May, scheduled for later in the North American trading hours.
Despite prospects of support from higher-than-expected Japanese Producer Price Index (PPI) data, which indicated a year-on-year jump of 2.4% in May, surpassing market forecasts of a 2.0% rise, concerns loomed over potential implications for consumer inflation.
The Bank of Japan (BoJ) is anticipated to maintain its current monetary policy unchanged on Friday, perpetuating the interest rate divergence between the US and Japan, which continues to undermine the Japanese Yen and bolster the USD/JPY pair.
The US Dollar Index (DXY), measuring the USD’s value against six major currencies, remained robust, buoyed by optimistic US jobs data for May, consequently reducing the likelihood of a Fed rate cut in September. According to the CME FedWatch Tool, the probability of a September rate cut by at least 25 basis points decreased to 52%, down from 67% a week earlier.
Market sentiment regarding Japan’s fiscal policy was underscored by Japan Finance Minister Shunichi Suzuki’s remarks, emphasizing the importance of sustaining economic growth and fiscal health to maintain confidence.
Amidst speculations, nearly two-thirds of economists surveyed anticipate the Bank of Japan’s consideration of tapering its monthly bond purchases at the upcoming policy meeting, signaling a significant step towards reducing the central bank‘s burgeoning balance sheet.
Takeshi Minami, Chief Economist at Norinchukin Research Institute, noted the diminishing necessity for large-scale government bond purchases given the proximity to the 2% inflation target.
Meanwhile, Japan’s economic landscape witnessed mixed signals, with the Gross Domestic Product (GDP) Annualized contracting by 1.8% in the first quarter, slightly surpassing market forecasts, while the GDP (QoQ) aligned with initial projections.
Looking ahead, Rabobank suggested potential rate cuts by the Federal Reserve in September and December, citing concerns over a possible economic slowdown amidst persistent inflation.
Technical analysis of the USD/JPY pair revealed a bullish inclination, as indicated by consolidation within an ascending channel pattern on the daily chart, accompanied by a 14-day Relative Strength Index (RSI) above the 50 level, suggestive of upward momentum.
Key levels to watch include the psychological barrier at 158.00, with a breakthrough potentially guiding the pair towards higher resistance levels. Conversely, breach of support levels, notably the 50-day Exponential Moving Average (EMA) at 155.03, could intensify downward pressure on the USD/JPY pair.
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