The Japanese Yen (JPY) broke a two-day losing streak on Monday as traders anticipate the Bank of Japan‘s (BoJ) policy meeting next week, where an interest rate hike may be considered to bolster the currency. Japan’s Prime Minister Fumio Kishida emphasized that normalizing the central bank’s monetary policy would support Japan’s transition to a growth-driven economy, according to Nikkei Asia.
The decline in speculative short positions in the Yen, which had reached their second-highest level, has been notable following Japan’s suspected Yen-buying intervention this month, which caught the market by surprise. As of Tuesday, Yen short positions held by market players, including hedge funds, totaled a net 151,072 contracts, according to the US Commodity Futures Trading Commission. This represents a decrease of 30,961 contracts from the previous week, marking the largest drop since May 7, when short positions fell by 33,466 contracts, as reported by Nikkei Asia. Traders are now closely monitoring the potential for further interventions.
The USD/JPY could see limited gains as the US Dollar (USD) faces pressure from increasing bets on a Federal Reserve (Fed) rate cut in September and ongoing concerns about the fragility of the US labor market. According to CME Group’s FedWatch Tool, markets now indicate a 91.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 90.3% a week earlier.
Market Movers: Japanese Yen Remains Weak Despite Intervention Threat
US President Joe Biden abandoned his re-election bid on Sunday, facing growing pressure from fellow Democrats, and endorsed Vice President Kamala Harris as the party’s candidate to challenge Republican Donald Trump in the November election, according to Reuters.
Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends leading to declines in neutral interest rates before the pandemic continue to persist. Williams noted, “My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic,” as reported by Bloomberg.
Japan’s National Consumer Price Index (CPI) for June remained steady at 2.8%, matching the previous month’s figure and maintaining the highest level since February. Meanwhile, Core CPI inflation rose to 2.6%, slightly above the previous reading of 2.5% but just below the consensus estimate of 2.7%.
JP Morgan anticipates no rate hike from the Bank of Japan (BoJ) in July or at any point in 2024. They do not foresee any hikes for the remainder of 2024, considering it premature to adopt a bullish stance on the Yen.
Kazushige Kamiyama, a senior BoJ official and the central bank’s Osaka branch manager, stated on Thursday that the BoJ aims to maintain an accommodative monetary environment as much as possible, according to Jiji News Agency.
During an interview with Bloomberg News on Tuesday, Donald Trump warned Fed Chair Jerome Powell against cutting US interest rates before November’s presidential election. However, Trump also indicated that if re-elected, he would allow Powell to complete his term if he continued to “do the right thing” at the Federal Reserve.
Data released on Tuesday showed that the BoJ intervened in the foreign exchange market on consecutive trading days last Thursday and Friday. The current account balance data from the BoJ, released on Tuesday, indicates an anticipated liquidity drain of approximately ¥2.74 trillion ($17.3 billion) from the financial system on Wednesday due to various government sector transactions, according to Nikkei Asia.
Fed Chair Jerome Powell mentioned earlier this week that the three US inflation readings of this year “add somewhat to confidence” that inflation is on course to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may not be far off.
Technical Analysis: USD/JPY Near 157.50
The USD/JPY pair traded around 157.60 on Monday. Daily chart analysis indicates the pair is below its nine-day Exponential Moving Average (EMA) of 158.14, suggesting short-term downward momentum and advising caution before considering buying. Additionally, the 14-day Relative Strength Index (RSI) is below 50, reinforcing a bearish outlook.
The USD/JPY pair may find significant support near June’s low of 154.55. A drop below this level could lead to a decline toward May’s low of 151.86.
On the upside, immediate resistance is at the nine-day EMA of 158.14. Breaking above this level could see the USD/JPY pair testing resistance around the psychological level of 162.00.
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