The Japanese Yen (JPY) continued its upward trajectory for the second consecutive session on Tuesday, buoyed by increased risk aversion among traders. Market participants are closely monitoring the upcoming interest rate decision by the Bank of Japan (BoJ), where a potential rate hike is being considered to bolster the Yen.
Toshimitsu Motegi, a senior official in Japan’s ruling party, has called on the BoJ to provide clearer communication regarding its plans to normalize monetary policy through gradual interest rate hikes. He emphasized that excessive declines in the Yen were negatively impacting the economy. Prime Minister Fumio Kishida echoed this sentiment, stating that normalizing monetary policy would aid Japan’s transition to a growth-driven economy.
USD/JPY Pair Faces Headwinds as Fed Signals Potential Rate Cut
The USD/JPY pair is encountering difficulties as the US Dollar (USD) struggles amid increasing speculation of a Federal Reserve (Fed) rate cut in September. Fed Chair Jerome Powell recently expressed optimism about the progress made on inflation, while Fed Governor Christopher Waller indicated that the time to lower the policy rate is approaching.
Daily Market Movers: Yen Strengthened by Risk Aversion
Vice President Kamala Harris has reportedly secured the Democratic nomination for the upcoming presidential election by surpassing 1,976 delegates. This development is likely to influence market dynamics in the coming months.
Federal Reserve Bank of New York President John Williams stated that long-term trends causing declines in neutral interest rates before the pandemic are still in effect. Williams cited estimates for r-star in the US, Canada, and the Euro area as being at similar levels to those before the pandemic.
Japan’s Inflation Data and BoJ’s Stance
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. Core CPI inflation slightly increased to 2.6%, just above the previous reading of 2.5%.
Despite this inflationary pressure, JP Morgan has forecasted that the BoJ will not implement a rate hike in July or at any point in 2024. They argue that it is too early to adopt a bullish stance on the Yen.
Kazushige Kamiyama, a senior BoJ official, reiterated the central bank’s commitment to maintaining an accommodative monetary environment for as long as possible.
US Interest Rates and Political Implications
In a recent interview with Bloomberg News, former President Donald Trump advised Fed Chair Jerome Powell against cutting US interest rates before the November presidential election. Trump also hinted that he would allow Powell to complete his term if he continued to “do the right thing” at the Fed.
BoJ’s Market Interventions and US Treasury Sales
Recent BoJ data suggests that the authorities may have intervened in the market by purchasing nearly ¥6 trillion on July 11-12. Additionally, Japan sold approximately $22 billion in US Treasuries in May to bolster its dollar reserves for potential foreign exchange market operations.
Technical Analysis: USD/JPY Trends Lower
The USD/JPY pair traded around 156.60 on Tuesday. Technical analysis of the daily chart shows that the pair is below its nine-day Exponential Moving Average (EMA) of 157.75, indicating short-term downward momentum. The 14-day Relative Strength Index (RSI) is also below 50, reinforcing a bearish outlook.
The USD/JPY pair may find significant support near June’s low of 154.55. A decline below this level could trigger a further drop toward May’s low of 151.86.
On the upside, immediate resistance is at the nine-day EMA of 157.75. A breakout above this level could push the USD/JPY pair toward the psychological resistance level of 162.00.
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