The Japanese Yen (JPY) weakened against the US Dollar (USD) on Tuesday, despite underlying factors that could limit further downside. Japan’s economy grew at an impressive annualized rate of 3.1% in the second quarter, significantly surpassing expectations and rebounding from a previous slowdown, signaling potential for near-term interest rate hikes.
According to Reuters, the Bank of Japan (BoJ) had anticipated that a strong economic recovery would help sustain inflation at its 2% target, justifying additional interest rate increases. This comes on the heels of the BoJ’s recent rate hike, part of its strategy to unwind years of extensive monetary stimulus. BoJ Governor Kazuo Ueda is scheduled to address the central bank’s recent decision to raise rates on Friday.
Meanwhile, the US Dollar recovered some of its recent losses, driven by risk aversion sentiment. However, the Greenback faces challenges amid growing speculation about potential US interest rate cuts. On Monday, Minneapolis Fed President Neel Kashkari suggested that rate cuts might be considered in September due to concerns over a weakening labor market. Similarly, Federal Reserve Bank of San Francisco President Mary Daly emphasized the need for a gradual approach to reducing borrowing costs, while Federal Reserve Bank of Chicago President Austan Goolsbee cautioned against maintaining restrictive policies longer than necessary.
Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, noted that Japan’s economic reports are generally positive and support the BoJ’s view on further rate hikes, though caution is warranted given the sharp spike in the Yen following the last increase. Japanese Economy Minister Yoshitaka Shindo added that the economy is expected to recover gradually as wages and income improve, with the government closely collaborating with the BoJ to implement flexible macroeconomic policies.
Japan’s GDP grew by 0.8% quarter-on-quarter in Q2, beating market forecasts of 0.5% and rebounding from a 0.6% decline in Q1. This marked the strongest quarterly growth since Q1 of 2023. The annualized GDP growth of 3.1% exceeded market expectations of 2.1% and reversed a 2.3% contraction in Q1, representing the strongest yearly expansion since Q2 of 2023.
In contrast, the US Consumer Price Index (CPI) rose by 2.9% year-over-year in July, down slightly from 3% in June and below market expectations. The Core CPI, excluding food and energy, increased by 3.2% year-over-year, in line with forecasts but slightly lower than June’s 3.3% rise.
Rabobank’s senior FX strategist, Jane Foley, indicated that this week’s US data releases, along with next week’s Jackson Hole event, are expected to provide clearer insights into the Fed’s potential policy responses. The market anticipates a 25 basis point rate cut by the Fed in September, with a possible additional cut before the year’s end.
Technical Analysis: USD/JPY Hovering Around 146.50
The USD/JPY pair is trading near 146.60 on Tuesday, just below the nine-day Exponential Moving Average (EMA), indicating a short-term bearish trend. The 14-day Relative Strength Index (RSI) is slightly above 30, suggesting a potential correction.
On the downside, the pair could test the seven-month low of 141.69, reached on August 5. A further decline might push it toward the next significant support level at 140.25. On the upside, immediate resistance could be encountered around the nine-day EMA at 147.41. Breaking above this level might target the 50-day EMA at 152.54 and test resistance at 154.50.
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