• The Japanese Yen retreats after touching a one-week high against its American counterpart. 
  • Rising bets for an imminent BoJ rate rise this year should limit any deeper losses for the JPY. 
  • The narrowing US-Japan yield differential might also lend support to the lower-yielding JPY. 

The Japanese Yen (JPY) remains depressed through the early European session on Tuesday, though it lacks bearish conviction amid the growing acceptance that the Bank of Japan (BoJ) will hike interest rates further. Furthermore, the recent narrowing of the US-Japan yield differential, led by bets for additional interest rate cuts by the Federal Reserve (Fed), contributes to limiting losses for the lower-yielding JPY. 

That said, the optimism over a delay in the implementation of US President Donald Trump's reciprocal tariffs and talks aimed at ending the Russia-Ukraine war undermine demand for the safe-haven JPY. Apart from this, a goodish pickup in the US Treasury bond yields assists the US Dollar (USD) to snap a three-day losing streak to a two-month low and remains supportive of the bid tone surrounding the USD/JPY pair. 

Japanese Yen retains its negative bias amid a pickup in US bond yields, modest USD strength

  • US President Donald Trump said on Thursday that he plans to unveil reciprocal tariffs, which would aim at every country that charges duties on US imports, though he stopped short of giving any details. 
  • Furthermore, the optimism over talks between the US and Russia aimed at ending the war in Ukraine boosted investors' confidence and undermined demand for the safe-haven Japanese Yen on Tuesday. 
  • Against the backdrop of strong inflation figures from Japan, the solid Q4 Gross Domestic Product (GDP) released on Monday cemented the case for imminent rate hikes from the Bank of Japan this year.
  • Markets are now pricing in roughly another 37 basis points worth of increases by December, pushing the yield on the benchmark 10-year Japanese government bond to its highest level since April 2010.
  • Meanwhile, a surprise drop in US Retail Sales, along with mixed signals on inflation, suggests that the Federal Reserve could possibly cut interest rates at the September or October policy meeting. 
  • Philadelphia Fed President Patrick Harker said on Monday that the labor market is largely in balance and the current economy argues for a steady policy as inflation has been sticky over recent months.
  • Fed Board of Governors member Michelle Bowman noted that high asset prices may have impeded progress on inflation and more certainty is needed on declining inflation before reducing rates.
  • Fed Board of Governors member Christopher Waller said that inflation progress last year has been excruciatingly slow and that rate cuts would be appropriate in 2025 if inflation repeats the 2024 pattern.
  • Nevertheless, Fed Funds Futures see a 40 basis point Fed rate cut in 2025, causing the recent decline in the US Treasury bond yields and contributing to the narrowing of the US-Japan rate differential.
  • Traders look to the release of the Empire State Manufacturing Index from the US, which, along with speeches by influential FOMC members, would drive the US Dollar and the USD/JPY pair. 

USD/JPY bears have the upper hand while below 200-day SMA hurdle near the 152.65 area

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From a technical perspective, last week's failure near the 50% retracement level of the January-February down leg and the subsequent slide below the very important 200-day Simple Moving Average (SMA) favors bearish traders. Moreover, oscillators on the daily chart are holding in negative territory and suggest that the path of least resistance for the USD/JPY pair is to the downside. Hence, any further move up towards the 152.00 mark could be seen as a selling opportunity, which should cap spot prices near the 152.65 region (200-day SMA). This is followed by the 100-day SMA, currently pegged near the 153.15 region, which if cleared could trigger a short-covering rally beyond the 154.00 mark, towards the 154.45-154.50 supply zone en route to last week's swing high, around the 154.75-154.80 region. 

On the flip side, the 151.25 area, or the Asian session low, now seems to act as immediate support ahead of the 151.00-150.90 zone, or the year-to-date trough touched earlier this month. A convincing break below the latter would expose the 150.00 psychological mark. Some follow-through selling should pave the way for a fall toward the 149.60-149.55 region en route to the 149.00 round figure and the December 2024 swing low, around the 148.65 region.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

 

Source: Fxstreet