The Japanese Yen (JPY) has strengthened on Monday as traders anticipate the Bank of Japan’s (BoJ) policy meeting scheduled for Wednesday, which may result in a potential rate hike. Market predictions suggest the BoJ might increase rates by 10 basis points to 0.1% and is expected to announce plans to taper bond purchases.
The JPY’s gains are also supported by traders potentially unwinding carry trades before the BoJ’s decision. Masato Kanda, Japan’s top currency diplomat, highlighted at the G20 on Friday the negative impact of foreign exchange (FX) volatility on Japan’s economy. He noted the likelihood of a soft landing and underscored the importance of closely monitoring economic conditions and implementing necessary measures, as reported by Reuters.
In contrast, the US Dollar (USD) faces challenges due to cooling inflation and easing labor market conditions in the United States. These factors have led to expectations of three rate cuts by the Federal Reserve (Fed) this year, beginning in September.
The Japanese government and the BoJ are urged to consider the effects of a weak JPY on policy decisions. The impact of a depreciated Yen and rising prices on consumer behavior is a critical concern, according to Japan’s top council.
Reuters reports that the BoJ is reviewing past policies, reflecting a shift towards a readiness for higher rates. However, no immediate changes to the inflation target or policy framework are expected.
Recent data shows the US Personal Consumption Expenditures (PCE) Price Index rose by 2.5% year-over-year in June, slightly down from 2.6% in May, aligning with market expectations. The monthly increase in the PCE Price Index was 0.1% in June, following no change in May. Core PCE inflation, excluding food and energy, also increased to 2.6% in June, consistent with May and above the 2.5% forecast.
In Japan, the Tokyo Consumer Price Index (CPI) for July rose 2.2% year-over-year, slightly below the previous 2.3% increase. The CPI excluding Fresh Food and Energy rose by 1.5%, down from 1.8%. CPI excluding Fresh Food alone rose 2.2%, matching market expectations.
Bank of America has suggested that strong US economic growth allows the Federal Open Market Committee (FOMC) to delay rate adjustments, expecting rate cuts to begin in December. Meanwhile, the BlackRock Investment Institute and JP Morgan foresee no rate hike by the BoJ at next week’s meeting or throughout 2024.
Technical analysis of the USD/JPY pair shows it trading around 153.20 on Monday. The daily chart indicates a potential strengthening of bearish bias with the pair testing the descending channel. The 14-day Relative Strength Index (RSI) below 30 suggests an oversold condition and a possible short-term rebound. A breach below the channel’s lower boundary near 153.00 could lead to further declines, possibly revisiting May’s low of 151.86, with additional support around the psychological level of 151.00. Conversely, the pair may test resistance levels at 154.50 and 155.24, with further resistance near 156.20.
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