On Friday, the Japanese Yen (JPY) regained strength against the US Dollar (USD), buoyed by recent economic data indicating growth in Japan’s second-quarter GDP. This development raises the prospect of a near-term interest rate hike by the Bank of Japan (BoJ).
Yen’s Resurgence and Economic Indicators
The JPY’s rally follows Japan’s report of a 0.8% quarter-on-quarter GDP increase for Q2, surpassing the expected 0.5% growth and recovering from a 0.6% decline in Q1. This was Japan’s strongest quarterly growth since Q1 2023, with an annualized growth rate of 3.1%, exceeding the market consensus of 2.1%. This also marked the most robust yearly expansion since Q2 2023. Japanese Economy Minister Yoshitaka Shindo noted that the economy is expected to recover gradually as wages and income rise, and confirmed the government’s commitment to working closely with the BoJ on flexible macroeconomic policies.
Political Uncertainty and Market Reactions
Despite the positive economic data, the JPY faces potential headwinds from political instability. Prime Minister Fumio Kishida has announced that he will not seek re-election as the leader of the Liberal Democratic Party (LDP) in September, which will end his term as prime minister. Kishida had advocated for measures to combat Japan’s deflationary trends and aimed to expand Japan’s GDP to ¥600 trillion.
Impact on USD/JPY Exchange Rate
The USD/JPY pair saw a decline as the US Dollar weakened, partly due to lower Treasury yields and market expectations of a 25 basis point rate cut by the US Federal Reserve in September. However, recent US economic data provided some support for the Greenback. US Retail Sales for July increased by 1.0% month-over-month, reversing June’s 0.2% decline, and Initial Jobless Claims were reported at 227,000, lower than forecasts. Additionally, the US Consumer Price Index (CPI) rose by 2.9% year-over-year in July, slightly down from June’s 3% increase, with Core CPI climbing 3.2% year-over-year.
Federal Reserve Bank of Chicago President Austan Goolsbee has voiced concerns about labor market conditions, noting improvements in inflation but weaker jobs data. Goolsbee suggested that the pace of future rate cuts will depend on prevailing economic conditions.
Technical Analysis: USD/JPY Outlook
As of Friday, the USD/JPY pair traded around 148.80. Technical analysis indicates that the pair is positioned above the nine-day Exponential Moving Average (EMA), suggesting a short-term bullish trend. However, the 14-day Relative Strength Index (RSI) remains below 50, indicating that further gains are needed to confirm bullish momentum.
Support levels for the USD/JPY pair are seen at the nine-day EMA, around 148.09. A drop below this level could intensify the bearish outlook and potentially push the pair towards the seven-month low of 141.69 recorded on August 5. Conversely, resistance levels include the 50-day EMA at 153.08 and the resistance level at 154.50, which may be tested as the pair transitions from previous support to current resistance.
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