- The Japanese yen extended its rally to above 146.50 yen against the US dollar, its strongest level since last March, after the latest economic data widened the divergence between the monetary policy expectations of the US Federal Reserve and the Bank of Japan.
- Recently, the weak US jobs report had prompted financial markets to prepare for further interest rate cuts by the Fed this year in response to growing signs of a slowing economy.
- Meanwhile, the Bank of Japan raised its interest rate to a 16-year high of 0.25% and indicated the will to raise interest rates further if the economy merits it.
- Financial markets are betting on two more rate hikes this fiscal year ending in March 2025, with another hike in December.
According to the economic calendar, recent data also showed that Japanese authorities spent 5.53 trillion yen to support the currency through intervention in July. Meanwhile, the Japanese government said a weaker yen could erode household purchasing power by pushing inflation higher than wage growth, highlighting the urgent need for officials to support the currency.
According to forex trading, the Japanese yen continued to strengthen against the US dollar, (USD/JPY) but it may have come at the expense of Japanese financial markets. The yen had fallen to a four-decade low before authorities intervened to support the currency. However, officials may have triggered a bear market for the country’s stock market. To end the trading week, Japan’s benchmark Nikkei 225 index fell about 6% to close Friday’s session at 35,909.70. Japan’s consumer price index recorded its worst single-day performance in March 2020, falling below 36,000 for the first time since January.
Also, Japanese government bond yields fell, with the benchmark 10-year yield falling below 1%, its lowest level in two months.
Meanwhile, financial markets in Tokyo weakened, the yen staged a dramatic reversal. Moreover, this was driven by the Bank of Japan surprising most economists by raising interest rates and planning to buy fewer bonds over the coming years. Furthermore, the decision was made after BoJ Governor Kazuo Ueda suggested that a weaker yen could raise inflationary threats and force struggling Japanese households to bear the brunt of higher prices.
Generally, investors are expecting another rate hike before the end of the year. “Today’s move supports USD/JPY’s return below 150.00. There could be further declines ahead as the BoJ supports a stronger yen to combat inflation, and as the yield spread between the US and Japan narrows further,” analysts at XTB said.
Whether this translates into further yen support remains to be seen. The US dollar has weakened amid the Federal Reserve’s signal of a September rate cut. According to electronic trading platforms, US financial markets have been falling over the past two sessions, with the technology-based Nasdaq Composite sliding into correction territory.
Meanwhile, the Japanese yen has fallen 4% against the US dollar since the start of the year. Global demand concerns for crude oil have recently outweighed supply risks from rising geopolitical tensions in the Middle East.
According to the economic calendar, data released on Friday showed that job growth in the United States slowed sharply, the unemployment rate rose to 4.3% and wage growth slowed. This comes on top of weak manufacturing data. The ISM manufacturing purchasing managers’ index revealed a larger-than-expected contraction in factory activity in the United States, while factory activity in China unexpectedly contracted, the first decline since last October.
Meanwhile, markets are closely watching Iran’s response to the assassination of Hamas leader Ismail Haniyeh, which followed the killing of Hezbollah’s top commander in an airstrike in Beirut.
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USD/JPY Technical Analysis and Expectations Today
According to the performance on the daily chart below, the USD/JPY is in a downward channel path and the support of 146.00 confirms the bears' control, while at the same time moving the technical indicators towards strong oversold levels. You can buy without risk from the support levels of 145.45 and 144.00 respectively. On the other hand, over the same period of time, stability above the resistance of 152.85 will give bulls a new opportunity to control. The USD/JPY price will continue to be affected by the future policies of global central banks, in addition to the extent of investors' appetite for risk or not.
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