The Japanese Yen is facing a series of challenges, from divergent BoJ-Fed expectations to easing Middle East tensions, which are capping the safe-haven JPY. Investors are closely monitoring the possibility of a government intervention in the markets by Japanese authorities, leading to speculations and contributing to some support for the JPY. Despite this, a significant appreciating move for the JPY remains out of reach due to the expectation that the interest rate gap between the US and Japan will remain wide. The Bank of Japan (BoJ) has made it clear that there is no rush for policy normalization, in contrast to the Federal Reserve (Fed) which is expected to delay cutting interest rates due to sticky inflation.
Monetary policy in the US is principally shaped by the Federal Reserve (Fed), which has the dual mandate of achieving price stability and fostering full employment. The primary tool for the Fed to achieve these mandates is through the adjustment of interest rates. If inflation exceeds the Fed’s 2% target, interest rates are raised to cool down the economy, leading to a stronger US Dollar as it becomes more attractive for foreign investors. Conversely, when inflation is below target or unemployment is high, the Fed may lower interest rates to encourage borrowing and spending, resulting in a weaker US Dollar.
The Federal Reserve holds eight policy meetings a year where the Federal Open Market Committee (FOMC) assesses economic conditions and makes decisions on monetary policy. The FOMC is comprised of twelve Fed officials, including the members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four regional Reserve Bank presidents on a rotating basis. In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase the flow of credit in the financial system. QE involves the Fed purchasing high-grade bonds from financial institutions using newly printed money, leading to a weaker US Dollar.
In contrast, Quantitative Tightening (QT) is the opposite of QE, where the Fed stops buying bonds and allows existing bonds to mature without reinvesting the principal. This policy is typically positive for the value of the US Dollar as it reduces the supply of Dollars in the financial system. The recent hawkish stance by FOMC members has kept the US Dollar elevated, which acts as a tailwind for the USD/JPY pair. Traders are awaiting key US macroeconomic data releases, including the Advance US Q1 GDP print and the Personal Consumption Expenditures (PCE) Price Index, as well as the BoJ meeting to determine future market directions.
From a technical perspective, the Relative Strength Index (RSI) on the daily chart indicates overbought conditions for the USD/JPY pair, potentially limiting further upside movements. The 154.35-154.30 region is likely to attract dip-buyers, preventing the pair from falling below the 154.00 mark. However, a break below 153.00 could trigger aggressive selling, leading to a potential decline towards the 152.50 intermediate support. On the upside, the 154.85 region and the psychological level of 155.00 present immediate hurdles, with a sustained move beyond indicating a bullish trend continuation since March.
The interplay between Japanese Yen dynamics, US monetary policy, and key economic indicators will shape the future direction of the USD/JPY pair. Traders will closely monitor BoJ and Fed decisions, economic data releases, and technical levels to make informed trading decisions.