The Japanese Yen (JPY) ended its three-day winning streak against the US Dollar (USD) following the release of Japan’s Trade Balance data on Wednesday. Despite this setback, the Yen’s decline could be limited due to increasing expectations of another interest rate hike in the near future. Market participants are also focused on Bank of Japan (BoJ) Governor Kazuo Ueda’s upcoming parliamentary appearance on Friday, where he will discuss the central bank‘s recent decision to raise interest rates.
Japan’s Merchandise Trade Balance slipped into a deficit of ¥621.84 billion in July, reversing June’s surplus of ¥224.0 billion and falling short of market expectations of a ¥330.7 billion deficit. This marks the fifth deficit in 2023, driven by a significant surge in imports, which outpaced exports.
Meanwhile, the US Dollar is attempting to halt its own three-day losing streak as traders await the Federal Open Market Committee (FOMC) Meeting Minutes for July, set to be released later on Wednesday. Additionally, all eyes are on Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium on Friday.
According to the CME FedWatch Tool, market sentiment has shifted, with the likelihood of a 25 basis points (bps) Fed rate cut in September decreasing to 67.5%, down from 76% the previous day. The probability of a 50 bps rate cut has also dropped, now standing at 32.5%, compared to 53.0% a week earlier.
Market Dynamics: Yen Weakens as Trade Balance Disappoints
A recent Reuters poll revealed that over half of the surveyed economists expect the BoJ to raise interest rates again by year-end. In the August 13-19 survey, 31 out of 54 economists predicted a rate hike, with a median forecast of a 0.50% interest rate by year-end, marking a 25 bps increase.
Japan’s imports surged by 16.6% year-on-year in July, reaching a 19-month high of ¥10,241.01 billion, surpassing market expectations and significantly up from June’s 3.2% rise. Conversely, exports grew by 10.3% YoY to ¥9,619.17 billion, accelerating from the previous month’s 5.4% growth but falling short of market forecasts of 11.4%.
On the US side, Federal Reserve Governor Michelle Bowman expressed caution on Tuesday regarding policy changes, emphasizing the need to avoid overreacting to individual data points, which could derail progress on inflation. Other Fed officials, including San Francisco Fed President Mary Daly and Chicago Fed President Austan Goolsbee, echoed this cautious stance, advocating for a gradual approach to policy adjustments.
Japan’s economic outlook received a boost as its Gross Domestic Product (GDP) grew by 0.8% quarter-on-quarter in Q2, surpassing expectations and rebounding from a 0.6% contraction in Q1. The annualized GDP growth reached 3.1%, exceeding the market consensus and marking the strongest yearly expansion since Q2 2023.
Technical Outlook: USD/JPY Faces Resistance at 145.50
The USD/JPY pair was trading around 145.50 on Wednesday, showing signs of consolidation under a downtrend line, indicating a bearish bias. The 14-day Relative Strength Index (RSI) is slightly above 30, suggesting a potential correction.
Support levels for the USD/JPY pair could be found around the 144.00 and 143.00 regions, with a more significant support level at 141.69, a seven-month low recorded on August 5. A further decline could push the pair toward the key support level at 140.25.
On the upside, immediate resistance lies at the downtrend line near the nine-day Exponential Moving Average (EMA) at 146.80. A breakthrough above this level could lead the pair to test resistance at 154.50, a level that has transitioned from previous support to current resistance.
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