- The USD/JPY exchange rate has declined for the second consecutive week, reaching its lowest level since December last year.
- The pair dropped to the 139.60 support level, down about 14% from its high this year, indicating it has entered a correction phase.
- According to licensed trading platforms, GBP/JPY and EUR/JPY also fell to 185 and 156, respectively, down more than 10% from their highs this year. Meanwhile, AUD/JPY dropped to 94.42, its lowest since July 5.
Fed Rate Decision
The USD/JPY exchange rate fell sharply as investors anticipated the upcoming interest rate decision from the US Federal Reserve. Recent economic figures show that the economy has been slowing, meaning the Federal Reserve will need to step in to cut US interest rates. Also, economic data released earlier this month showed that the unemployment rate held steady above 4% in August as the economy created 113,000 jobs.
Moreover, there are signs that the number of US non-farm payrolls has been weaker than reported. Also, the Bureau of Labor Statistics has revised down the number of jobs added to the economy in recent months. In a recent report, the bureau revised down the number of jobs created in the 12 months through March by more than 818,000. At the same time, there are signs that inflation in the US is slowing and could fall to the Fed’s target of 2.0%. Data released last week showed that the core consumer price index fell from 2.9% in July to 2.5% in August, its lowest level in months.
Meanwhile, there are signs that inflation in the country is slowing as energy prices fall. Brent crude, the global benchmark, fell to $71, while West Texas Intermediate (WTI) crude fell to $69. As a result, gasoline prices have been moving lower in the past few months.
Therefore, expectations are for the Fed to cut rates by either 0.25% or 0.50% at this meeting. In a note, Bloomberg analysts said: “We believe Fed Chairman Jerome Powell supports a 50-basis point cut. However, the lack of a clear signal from New York Fed President John Williams before the blackout period before the meeting makes us believe that Powell does not have the committee’s full support.”
The Fed’s cut will come a week after the European Central Bank cut interest rates for the second time this year to stave off a slowdown in the country.
Bank of Japan Decision
Another major catalyst for the USD/JPY exchange rate will be the Bank of Japan’s upcoming interest rate decision on Friday. Clearly, the decision comes a month after the bank stirred up market turmoil by raising interest rates for the second time this year. Likewise, economists expect the central bank to take a wait-and-see approach at this meeting even as inflation remains stubbornly high.
The latest data showed that the core consumer price index remained at 2.8% in July, above the median estimate of 2.7%. furthermore, It has risen from a low of 2.2% earlier this year. Also, there are signs that the Japanese economy is slowing. The latest economic data showed that GDP expanded by 2.9% in the second quarter, below the expected 3.1%. One of the main concerns for Japan is that the auto industry is undergoing a major change, with China becoming a dominant player. China also dominates other industries in Southeast Asia, and Japan has been a big player.
Japanese carry trade rebounds in yen
The decisions of the Bank of Japan and the US Federal Reserve will be notable because of the carry trade that has been around for many years. Meanwhile, the carry trade is a situation where investors borrow money in countries with low interest rates and invest in countries with high interest rates. In the past, it was very profitable to borrow in Japan, where interest rates were negative, to invest in the United States. Now, with the Fed cutting rates and the Bank of Japan relatively hawkish, the gap has narrowed, making the carry trade unattractive.
Therefore, the major actions of the Fed and the Bank of Japan are unlikely to have a significant impact on the USD/JPY pair. Instead, the currency pair will react to the comments of Powell and Kazuo Oda of the Bank of Japan, who will indicate the next actions.
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USD/JPY Technical Analysis and Expectations Today:
The daily chart shows that the USD/JPY exchange rate peaked above 160 earlier this year and then experienced a sharp reversal as the BoJ began raising rates. Recently, the pair formed a death cross pattern, where the 200-day and 50-day exponential moving averages crossed. The death cross is one of the most bearish patterns in the market. Additionally, the pair has fallen below the key support level of 141.67, the lowest level in August. Therefore, the pair is likely to continue lower as sellers target the key support level at 137.16, the lowest since July last year.
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