The US dollar has been experiencing various ups and downs against the Japanese Yen, driven by market forces and economic reports from both nations.
Recently, the USD/JPY pair has exhibited a downward trend, struggling beneath critical resistance levels and mirroring widespread market concerns.
Recent movements in USD/JPY
The USD/JPY pair recently dipped beneath the 157.20 support level, extending its decline to test the 155.35 mark. This downward move was backed by technical signals, with the pair settling below both the 100 and 200 simple moving averages on the 4-hour chart.
After a brief recovery to 155.80, the pair encounters significant resistance around the 157.20 and 157.50 levels, with a key bearish trend line forming a barrier at 157.80. On Thursday, the pair posted crucial gains of over 0.70%, recovering to 157.00. This bounce was driven by a risk-on sentiment in the market, pushing the exchange rate to 157.39 from daily lows of 155.37.
Nevertheless, bearish momentum persists, as indicated by the RSI staying below the 50-neutral mark, implying a potential near-term continuation of the downtrend for the USD/JPY.
Economic indicators and Central Bank policies
The USD/JPY pair's dynamics are significantly influenced by economic metrics and central bank policies from both nations. Japan's inflation rate maintained a steady 2.8% in June, with core inflation edging up to 2.6% from May's 2.5%.
These figures have heightened investor anticipation of an upcoming rate hike by the Bank of Japan and a scale-back in Japanese Government Bond purchases. An increase in core inflation supports the possibility of a more assertive rate hike by the BoJ, which could reduce interest rate differentials favoring the Yen, potentially driving the USD/JPY below the 150 mark.
Alternatively, a modest reduction in JGB purchases without a rate hike might disappoint investors, possibly leading the USD/JPY back to the 160 level before the next Federal Reserve meeting.
Broader economic implications
Inflation's impact goes beyond central bank policies. The weak Yen has repercussions for Japan's economy, influencing household consumption and import expenses.
BoJ Deputy Governor Ryozo Himino has noted that exchange rate variations significantly affect inflation and economic activity. Parallelly, S&P Global Market Intelligence's Jinyi Pan emphasized the stress on Japanese companies from rising input costs and weaker output price inflation, particularly in the service sector.
These economic pressures could impact the labor market and wage growth, further affecting household spending. In Q1 2024, Japan's private consumption declined by 0.7%, indicating broader economic difficulties. This situation adds pressure on the BoJ to tackle both price stability and the Yen's weakness.
Fed's influence on USD/JPY
Fed's policy choices also significantly impact the USD/JPY pair. Recent comments by FOMC members, including John Williams and Raphael Bostic, have hinted at potential changes in the Fed's interest rate strategy.
Williams mentioned that a rate cut in July was unlikely but did not rule out a possible cut in September. This stance could dampen demand for the US Dollar, affecting the USD/JPY pair.
Investors should keep a close watch on upcoming US economic data, such as the July services PMI and the US Personal Income and Outlays Report.
A robust US services sector and rising inflation could delay Fed rate cuts, helping a stronger USD. Conversely, weaker data might confirm expected rate cuts in September and December, applying downward pressure on the USD/JPY pair.
From a technical perspective, the USD/JPY remains below the 50-day EMA but comfortably above the 200-day EMA. This setup suggests a bearish short-term outlook but a potentially bullish longer-term trend. A surge above the 50-day EMA could signal a move towards 160, while a drop below the 155 level could lead to testing the 200-day EMA and the 151.685 support level.