The Japanese Yen (JPY) has retraced its recent gains against the US Dollar (USD) as trading volumes remain low due to the Japanese markets being closed for Mountain Day. The USD/JPY pair has found support from stronger-than-expected US economic data released last week, which has led traders to scale back their expectations for interest rate cuts by the US Federal Reserve.
On Sunday, Federal Reserve Governor Michelle Bowman highlighted ongoing risks of inflation and continued strength in the labor market, suggesting that the Fed may not be ready to cut rates at its next meeting in September. According to Bloomberg, Bowman’s comments have fueled speculation that the Fed will maintain its current stance.
The CME FedWatch Tool now indicates a 46.5% probability of a 50-basis point rate cut at the Fed’s September meeting, a sharp decline from the 74.0% chance reported just a week ago.
Meanwhile, Japan’s monetary policy outlook has also been in focus. Last week, officials from the Bank of Japan (BoJ) indicated their readiness to raise rates further, although they have become more cautious due to increased market volatility. Japan’s Finance Minister Shunichi Suzuki emphasized that monetary policy decisions remain within the BoJ’s purview, while the government continues to closely monitor market developments, as reported by Reuters.
Market Movements: Geopolitical Tensions and Safe-Haven Flows
The Japanese Yen may find some support from safe-haven flows amid rising geopolitical tensions in the Middle East. ABC News reported that the Israel Defense Forces (IDF) intercepted approximately 30 projectiles crossing from Lebanon into northern Israel early Monday. While some of these projectiles landed in open areas, no injuries were reported.
Despite these developments, analysts remain cautious about the Yen’s potential for significant appreciation. A Julius Baer analyst noted that there is no immediate need for the BoJ to significantly raise interest rates. Once market conditions stabilize, the approximately 500-basis point interest rate differential between the JPY and USD is expected to become the primary influence on the currency pair. The analyst does not foresee further appreciation of the Yen.
Bloomberg reported that JP Morgan Asset Management (JPAM) believes the BoJ is unlikely to raise interest rates in the near term. JPAM suggests that the BoJ may only consider further rate hikes if the Federal Reserve cuts rates and the US economy stabilizes. They predict that any additional tightening by the BoJ is more likely to occur in 2025, provided global economic conditions remain stable.
Technical Analysis: USD/JPY Approaches Key Resistance
The USD/JPY pair is currently trading near 147.00, with the daily chart showing the pair above the descending channel, indicating a weakening bearish bias. The 14-day Relative Strength Index (RSI) is at 30, and if it rises toward 50, it could signal an improvement in momentum.
Support for the USD/JPY pair is expected around the 145.50 level. A break below this could lead to downward pressure, potentially driving the pair toward the 140.25 support level, and further down to the lower boundary of the descending channel near 137.00.
On the upside, the pair could test resistance at the nine-day Exponential Moving Average (EMA) around 147.75. A breakout above this level could diminish bearish momentum and allow the pair to approach the resistance level at 154.50.
As market participants continue to weigh the implications of US economic data and global geopolitical developments, the USD/JPY pair remains at a critical juncture, with traders closely watching for any shifts in momentum.
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