The Japanese Yen (JPY) has commenced the new year on a weaker note, influenced by the aftermath of a devastating earthquake in central Japan on Monday. Additionally, a modest strength in the US Dollar (USD), driven by an increase in US Treasury bond yields, has supported the bid tone surrounding the USD/JPY pair during the first half of the European session.
However, divergent expectations regarding future policy actions by the Bank of Japan (BoJ) and the Federal Reserve (Fed) are preventing further gains for the USD/JPY pair. Market sentiment suggests a belief that the BoJ will exit its ultra-loose policy and raise interest rates into positive territory by the first half of 2024, with April seen as a strong possibility after the annual wage negotiations in March. On the contrary, the Fed is expected to commence interest rate cuts as early as March 2024. The diverging expectations cap US bond yields and the US Dollar, favoring the Japanese Yen.
Geopolitical risks and concerns about China’s fragile economic recovery further contribute to the positive outlook for the safe-haven JPY. Traders, cautious ahead of the Federal Open Market Committee (FOMC) minutes on Wednesday and key US macroeconomic releases later in the week, are refraining from making significant directional bets. Waiting for strong follow-through buying is recommended before confirming a potential bottoming out of the USD/JPY pair and positioning for further gains.