- The Japanese yen has returned to around 161 yen per US dollar, paring gains made in recent sessions.
- This is as investors cautiously await Federal Reserve Chairman Jerome Powell’s testimony before Congress for clues on the path of US monetary policy.
- Also, key US inflation data will be scrutinized later in the week.
Last week, the yen fell to its lowest level in 38 years as stark interest rate differentials between Japan and other major economies encouraged investors to borrow yen and invest in higher-yielding currencies. Yesterday, USD/JPY gains extended to the 161.52 resistance level before settling around 161.20 at the time of writing.
The lack of urgency from the Bank of Japan to normalize monetary conditions also weighed on the yen, despite growing speculation that the BOJ could raise interest rates at its next policy meeting in late July. Meanwhile, the Japanese yen has gained some strength in recent sessions as the dollar weakened on weak US economic data, while concerns about further currency intervention by Japanese authorities provided additional support.
On another note, the yield on the 10-year Japanese government bond stabilized as the Bank of Japan moved.
According to reliable trading platforms, the yield on the 10-year Japanese government bond stabilized at 1.07%, remaining in a sideways trading range over the past two weeks, as markets cautiously awaited the Bank of Japan’s next policy moves at its next meeting in late July. The central bank was reportedly meeting with market participants to gauge the realistic pace of its plans to taper bond purchases, which it is scheduled to announce on July 31. Also, investors continued to assess whether the Bank of Japan will raise interest rates again this month, given the mixed signals from the latest batch of inflation and wage data. Moreover, the Bank of Japan is under pressure to raise interest rates soon after the Japanese yen recently fell to a 38-year low, increasing inflationary risks as it pushes up import costs.
In another development affecting the USD/JPY pair and financial markets in general, US Federal Reserve Chairman Jerome Powell reinforces the cautious approach to US interest rate cuts.
The US Federal Reserve left the target range for federal funds unchanged at 5.25%-5.50% for the seventh consecutive meeting in June 2024, in line with expectations. Furthermore, policymakers do not expect it will be appropriate to cut US interest rates until they gain greater confidence that inflation is moving sustainably towards 2%. Meanwhile, the dot chart showed that policymakers see just one rate cut this year and four in 2025. In March, the Fed was forecasting three cuts in 2024 and three in 2025. The Fed made no changes to its GDP growth forecast and still sees the economy expanding by 2.1% in 2024, 2% in 2025 and 2026. Ultimately, PCE inflation was revised higher for 2024 (2.6% vs. 2.4% in March) and next year (2.3% vs. 2.2%), but remained at 2%. For 2026. Core inflation for personal consumption expenditures was also revised to 2.8% in 2024 (from 2.6%) and 2025 (from 2.3% to 2.2%) but was kept at 2% for 2026. Finally, the US unemployment rate is expected to reach 4% for 2024, as forecasted in March, but is expected to rise slightly to 4.2% in 2025 (from 4.1%).
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USD/JPY Technical analysis and Expectations Today
According to the performance on the daily chart above, the USD/JPY bullish trajectory remains strong and ongoing. Breaking its recent record levels is possible unless there is an expected Japanese intervention in the forex markets. The factors that strengthen the currency pair are present, especially the divergence between the policies of the US Federal Reserve and the Bank of Japan, as well as economic performance. Technically, the closest resistance levels for the currency pair are currently 161.75, 162.30 and 163.00 respectively.
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USD/JPY (Daily Chart)