The Japanese Yen (JPY) managed to pause its three-day losing streak on Tuesday as investors speculated that the Bank of Japan (BoJ) might opt for an earlier-than-expected interest rate hike, responding to the weakened state of the JPY. However, the interest rate differential between Japan and the United States (US) continues to exert downward pressure on the JPY as investors pursue higher returns available in alternative assets, potentially strengthening the USD/JPY pair.
Japanese Finance Minister Shunichi Suzuki expressed concerns regarding the negative repercussions of the weakened JPY, emphasizing the need for appropriate national debt policies amidst discussions about increasing long-term rates. There is optimism for wage hikes to outpace inflation.
Meanwhile, the US Dollar (USD) maintained stability, supported by higher US Treasury yields. The US Federal Reserve (Fed) remains cautious regarding inflation, with the possibility of rate cuts in 2024 still under consideration.
Market Dynamics and Insights
A recent survey by the BoJ revealed that approximately 70% of firms have faced challenges due to the central bank‘s prolonged monetary easing, particularly citing the impact of a weakened JPY on import costs. However, around 90% of firms also acknowledged benefits such as low borrowing costs.
The yield on the 2-year Japanese government bond suggests an anticipation of policy rates reaching 0.25% in the latter half of the year and 0.5% next year.
Market sentiment indicates a potential reduction in bond purchases by the BoJ at the upcoming June policy meeting. However, BOJ Governor Kazuo Ueda has indicated no immediate plans to sell the central bank’s ETF holdings.
Technical Analysis and Outlook for USD/JPY
The USD/JPY pair hovered around the significant level of 156.50 on Tuesday, displaying an ascending triangle formation on the daily chart. The 14-day Relative Strength Index (RSI) signaled a bullish sentiment, marginally above the 50 mark.
A potential retest of the upper boundary of the ascending triangle around 157.00 is conceivable, with a break above this level potentially propelling the pair towards the high of 160.32, last seen in April 1990.
Conversely, immediate support is observed around the major level of 155.50, followed by the 21-day Exponential Moving Average (EMA) at 155.25. Further downside could lead the USD/JPY pair towards the throwback support at 153.60.
