After the US central bank's decision yesterday, the Japanese yen rose by more than 1% against the US dollar as traders intensified their bets on stronger US rate cuts by the Federal Reserve in 2024 therefore, with their speculation on the timing of the Bank of Japan's exit from negative interest rates, USD/JPY fell 1.3%, extending losses to the 140.95 support level, the pair's lowest level in four months.
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Moreover, these strong losses for the pair came as the US Federal Reserve signalled a pivot to rate cuts yesterday. Also, investors looked to the Bank of Japan's meeting next week for any hints on when it will adjust policy. Controversially, comments from Bank of Japan Governor Haruhiko Kuroda and one of his deputies last week sparked speculations that the Japanese central bank could end negative interest rates this month. Therefore, these expectations receded after people familiar with the matter said officials do not see a big need to rush to scrap the policy this month.
According to analysts, "the reason for this is the widespread weakness of the US dollar due to the unexpected cautious policy from the Federal Reserve with the fall in long-term US yields to below 4%." Adding, "The Japanese yen is also receiving additional support from the ongoing speculation that the Bank of Japan will end its negative interest rate system in the near future." Also, Analysts added that the cautious stance of the European Central Bank and the Bank of England later today could further highlight the contrast with the bets on tightening Bank of Japan policy, supporting yen buying. Shortly, the European Central Bank is expected to keep interest rates unchanged later today, as is the Bank of England, according to a Bloomberg survey of economists.
Commenting on the future of Bank of Japan policy, Shuji Omori, chief economist at Mizuho Securities, said: "The Bank of Japan now has less room to tighten policy due to the potential cuts in interest rates by the Federal Reserve." Adding, "It seems that currency markets are struggling to find the right level and the yen may face volatile trading." in the short term against both the dollar and the euro."
On the economic side, inflation in Japan has remained above the central bank's target of 2% per month since April 2022. However, Bank of Japan officials said they want to see more evidence of both inflation and wage growth. Therefore, with growing speculation about the Fed cutting interest rates, a growing number of investors see a greater obstacle for the Bank of Japan to raise borrowing costs after ending the negative interest rate regime. Furthermore, he might even think that it would be difficult for the Bank of Japan to end the negative interest rate. Meanwhile, the corrupt money scandal engulfing the long-ruling Liberal Democratic Party is seen as having the potential to strengthen the yen. Finally, the political faction of former leader Shinzo Abe – which championed monetary stimulus that led to a weaker yen – was at the centre of the scandal, leading to a view that this would help hasten the exit from current monetary policy.
USD/JPY Technical analysis and Expectations Today:
There is no doubt that the US Central Bank’s hints that it is ready to reduce US interest rates in the year 2024 is considered a major setback for USD/JPY. Therefore, the direction of the currency pair has turned bearish and the opportunity to break the psychological support of 140.00 is possible. Technically, we expect the bearish momentum of the currency pair to continue. Moreover, until the next announcement by the Central Bank of Japan or the receipt of statements from bank officials at any time regarding the future of abandoning negative interest rates. Obviously, that’s ruling out the matter soon means an opportunity for the dollar against the yen to rebound higher. Especially, since its recent losses have moved the technical indicators towards oversold levels.
On the other hand, over the same time in the daily chart, bulls will not regain control over the USD/JPY trend without returning to the resistance levels of 145.00 and 146.80, respectively. Today, the currency pair will be affected by the reaction to the US Central Bank’s decisions and the announcement of US retail sales numbers.
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