The Japanese Yen (JPY) edged lower on Wednesday as investors adopted a cautious stance ahead of key US data releases, including the US ADP Employment Change and ISM Services PMI reports. The market’s focus is expected to shift towards the Nonfarm Payrolls (NFP) report due on Friday.
Factors Influencing the Yen
The JPY’s potential for further depreciation is influenced by the interest rate differential between the United States and Japan, which supports the USD/JPY pair. However, the pair’s upside may be constrained by stronger-than-expected data from Japan released on Wednesday.
The Jibun Bank Japan Services PMI was revised higher to 53.8 in May from 53.6. Despite this upward revision, it was still below April’s eight-month peak of 54.3, indicating the slowest growth in the service sector since February. Additionally, Labor Cash Earnings surged by 2.1% year-on-year in April, surpassing forecasts of a 1.7% gain and marking the highest level since June of the previous year.
US Dollar Dynamics
The US Dollar Index (DXY), which measures the USD against six major currencies, has inched higher due to improved US Treasury yields. However, a weaker US Manufacturing PMI in May has increased the likelihood of the US Federal Reserve implementing its first rate cut in September.
According to the CME FedWatch Tool, traders now see a 64.9% chance of a Fed rate cut of at least 25 basis points, up from 46.3% a week earlier.
Market Movers and Economic Indicators
The JOLTS US Job Openings dropped by 296,000 to 8.059 million in April, the lowest level since February 2021, missing the market consensus of 8.340 million.
Bank of Japan (BoJ) Governor Kazuo Ueda indicated that the central bank would conduct “nimble” market operations if long-term interest rates spike, signaling readiness to increase bond buying if necessary. He also stated that the BoJ would adjust monetary support if underlying inflation accelerates as forecasted.
Japan’s government plans to emphasize the challenges posed by a weak Yen in its long-term economic policy roadmap, maintaining pressure on the BoJ to either raise interest rates or reduce its extensive bond-buying program.
The ISM Manufacturing PMI unexpectedly dropped to 48.7 in May from April’s 49.2, below the forecast of 49.6, marking the second consecutive month of contraction in the US manufacturing sector.
Technical Analysis: USD/JPY
The USD/JPY pair traded around 156.20 on Wednesday. Technical analysis suggests a weakening bullish bias as the pair breaks below the lower boundary of a symmetrical triangle pattern. The 14-day Relative Strength Index (RSI) is slightly below the 50 level, indicating a potential for further decline, which may confirm a bearish bias.
Immediate support for the USD/JPY pair is at the psychological level of 156.00, with further support at the 50-day Exponential Moving Average (EMA) at 154.72. A break below this level could increase pressure on the pair, potentially leading it towards the throwback support around 151.86.
On the upside, the lower boundary of the symmetrical triangle acts as a key barrier. A return to this pattern would reinforce the bullish bias, potentially leading the pair to test the upper boundary of the pattern. A break above the psychological barrier of 157.00 could see the pair retesting 160.32, its highest level in over thirty years.
Conclusion
The Japanese Yen’s performance is closely tied to upcoming US economic data and domestic economic indicators. While the interest rate differential supports the USD/JPY pair, robust Japanese data and technical factors may limit the pair’s upside. Traders will be keenly watching the Nonfarm Payrolls report and other key metrics for further direction.
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