The Japanese Yen (JPY) appreciated against the US Dollar (USD) on Thursday, with the USD/JPY pair retreating from its peak of 161.95, a level not witnessed since 1986. Traders are closely monitoring the Yen for significant movements and potential intervention by Japanese authorities to prevent excessive depreciation.
Rabobank FX strategists highlighted the critical role of yield differentials in the USD/JPY outlook, suggesting that FX intervention might be imminent due to the Yen’s weakness, which is negatively impacting consumer confidence.
Meanwhile, the Nikkei 225 Index surged to nearly 40,700 on Thursday, following gains on Wall Street. The weaker Yen boosted equities by improving the profit outlook for Japan’s export-driven industries.
US Dollar Faces Pressure Amid Economic Data and Fed Rate Cut Expectations
The US Dollar encountered challenges due to declining US Treasury yields, driven by underwhelming economic data that bolstered expectations of Federal Reserve (Fed) interest rate cuts in 2024. US markets remained closed on Thursday in observance of the Independence Day holiday.
OCBC strategists Frances Cheung and Christopher Wong noted that the persistent strength of USD/JPY is raising expectations of intervention. However, there is speculation about the extent to which authorities will allow further depreciation before intervening.
The US ISM Services PMI dropped sharply to 48.8 in June, marking the steepest decline since April 2020, falling well below market expectations of 52.5. The ADP Employment report showed that US private businesses added 150,000 workers in June, the lowest increase in five months, missing the forecasted 160,000 and the revised 157,000 in May.
Federal Reserve Bank of Chicago President Austan Goolsbee indicated that bringing inflation back to 2% will take time and more economic data are needed. Meanwhile, Fed Chair Jerome Powell stated that the central bank is returning to a disinflationary path but requires more evidence before cutting interest rates, as the US economy and labor market remain robust.
Minutes from the Fed’s June 11-12 monetary policy meeting suggested a data-dependent approach to monetary policy decisions. Japanese officials are preparing for more rate hikes by the Bank of Japan and may introduce a new type of floating-rate bond to help investors mitigate rising bond yields, according to Reuters.
Technical Analysis: USD/JPY Nears Overbought Conditions
The USD/JPY pair trades around 161.40 on Thursday, showing a bullish bias according to daily chart analysis. The pair is near the upper boundary of an ascending channel pattern, but caution is advised as the 14-day Relative Strength Index (RSI) is above 70, indicating overbought conditions and suggesting a possible correction.
In the near term, USD/JPY may test resistance near 162.10. A breakout above this level could strengthen bullish sentiment, potentially pushing the pair toward psychological resistance at 162.50.
On the downside, immediate support is observed around the nine-day Exponential Moving Average (EMA) at 160.68. A break below this level could weaken the bullish outlook, potentially guiding USD/JPY toward the lower boundary of the ascending channel near 158.80. A further decline below this support could see the pair navigating around June’s low at 154.55.
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