The Japanese Yen (JPY) has extended its gains for the third consecutive session on Wednesday, buoyed by a resurgence of risk-off flows. Market anticipation is growing that the Bank of Japan (BoJ) will raise interest rates at next week’s policy meeting. This expectation has prompted short-sellers to exit their positions, providing support to the JPY.
Monetary Policy Expectations and Political Influences
Senior ruling party official Toshimitsu Motegi has called on the BoJ to clearly communicate its plan to normalize monetary policy through gradual interest rate hikes, as reported by Reuters. Prime Minister Fumio Kishida echoed this sentiment, emphasizing that normalizing the central bank’s monetary policy would aid Japan’s transition to a growth-driven economy.
US Dollar Faces Challenges Amid Fed Rate Cut Bets
The US Dollar (USD) is under pressure due to increasing speculation about a Federal Reserve (Fed) rate cut in September. The CME Group’s FedWatch Tool indicates a 93.6% probability of a 25-basis point rate cut at the September Fed meeting, up from 88.5% the previous day. This expectation is weighing on the USD/JPY pair.
Market participants are closely monitoring the upcoming release of the US Purchasing Managers Index (PMI) data on Wednesday and the Gross Domestic Product (GDP) Annualized (Q2) figures on Thursday. These data points are anticipated to provide fresh insights into the US economic conditions.
Daily Digest Market Movers: Japanese Yen Gains on Risk-Off Flows
Despite the Yen’s recent strength, Japan’s Jibun Bank Manufacturing PMI unexpectedly fell to 49.2 in July from 50.0 in June, missing market forecasts of 50.5. This marks the first decline in factory activity since April. In contrast, the Services PMI surged to 53.9 in July from 49.4 the previous month, marking the sixth increase in the service sector this year and the steepest pace since April.
US Political Developments and Economic Commentary
Media reports indicate that Vice President Kamala Harris has secured 1,976 Democratic delegates, making her the Democratic Party’s presumptive nominee for the November Presidential Election.
On the economic front, Federal Reserve Bank of New York President John Williams stated that the long-term trends causing declines in neutral interest rates before the pandemic continue. Williams noted that his estimates for r-star (the natural rate of interest) in the US, Canada, and the Euro area remain at pre-pandemic levels.
Japan’s Inflation and BoJ’s Monetary Policy Stance
Japan’s National Consumer Price Index (CPI) for June held steady at 2.8%, the highest level since February. Meanwhile, Core CPI inflation edged up to 2.6%, slightly above the previous reading of 2.5% but just below the consensus estimate of 2.7%.
JP Morgan has projected no rate hike from the BoJ in July or throughout 2024, asserting that a July rate increase is not their base case and they do not anticipate any hikes for the remainder of the year. They believe it is too early to adopt a bullish stance on the Yen.
Kazushige Kamiyama, a senior BoJ official and the central bank’s Osaka branch manager, stated that the BoJ aims to maintain an accommodative monetary environment as much as possible, according to Jiji News Agency.
Recent BoJ data suggests that authorities may have intervened by purchasing nearly ¥6 trillion on July 11-12. Additionally, data revealed that Japan sold approximately $22 billion in US Treasuries in May to bolster its reserves for potential foreign exchange market operations, according to Reuters.
Technical Analysis: USD/JPY Trends
The USD/JPY pair trades around 155.20 on Wednesday. Technical analysis indicates that the pair is within an ascending channel, suggesting a dovish bias. The 14-day Relative Strength Index (RSI) is below 50, reinforcing a bearish outlook. If the RSI falls below the 30 level, it could indicate an oversold situation and a potential short-term rebound.
The USD/JPY pair may find significant support near June’s low of 154.55, followed by the lower boundary of the ascending channel. A decline below this level could lead to a further drop toward May’s low of 151.86.
On the upside, immediate resistance is at the nine-day EMA of 157.07, aligning with the upper boundary of the ascending channel. A breakout above this level could push the USD/JPY pair toward the pullback resistance around the psychological level of 162.00.
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