The Japanese yen pares its gains as the Fed interest rate decision approaches

The Japanese yen (JPY) has maintained its position, though it has trimmed intraday gains, as traders anticipate a potential large Federal Reserve (Fed) rate cut on Wednesday. Market attention will shift to the BoJ’s policy decision on Friday, with expectations that rates will remain unchanged, though further rate hikes could be on the table.

Japan’s Merchandise Trade Balance showed a larger deficit of ¥695.3 billion in August, up from ¥628.7 billion the previous month and well below the market forecast of a ¥1,380.0 billion shortfall. Exports grew by 5.6% year-over-year, marking the ninth consecutive month of growth, but fell short of the anticipated 10.0%. Imports rose by just 2.3%, the slowest pace in five months, and were well below the expected 13.4% increase.

The U.S. dollar (USD) remains under pressure amid increasing expectations that the Federal Open Market Committee (FOMC) may announce a significant 50 basis point rate cut on Wednesday. According to the CME FedWatch Tool, the probability of a 25 basis point cut is 33.0%, while the likelihood of a 50 basis point cut has risen to 67.0%, up from 62.0% the previous day.

Daily Digest Market Movers: Japanese Yen Appreciates Due to Dovish Fed Policy Outlook

• Japanese Finance Minister Shunichi Suzuki stated on Tuesday that rapid fluctuations in foreign exchange (FX) rates are undesirable. He emphasized that officials will closely monitor the effects of FX movements on the Japanese economy and people’s livelihoods, with the government assessing the impact of a stronger yen and responding as necessary, according to Reuters.

• Rabobank economists Jane Foley and Molly Schwartz noted on Monday that JPY net long positions have reached their highest level since October 2016. While a rate hike by the Bank of Japan (BoJ) at its policy meeting on September 20 is not anticipated, traders will be looking for hints that the October meeting could be more active.

• Commerzbank FX analyst Volkmar Baur expects the BoJ to stay on hold this week, suggesting that Federal Reserve actions will likely have a greater impact on the USD/JPY pair. He noted that the yen could fall below 140.00 per USD even without a rate hike from the BoJ.

• Fitch Ratings’ latest report indicates that the BoJ might raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by the end of 2026.

• The University of Michigan’s Consumer Sentiment Index rose to 69.0 in September, surpassing the market expectation of 68.0 and marking a four-month high. This reflects a gradual improvement in consumers’ outlook on the U.S. economy following previous declines.

• Hawkish BoJ policymaker Naoki Tamura stated on Thursday that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year, reinforcing the BoJ’s commitment to monetary tightening.

• The U.S. Producer Price Index (PPI) increased by 0.2% month-on-month in August, surpassing the forecasted 0.1% rise and the previous 0.0%. Core PPI also accelerated to 0.3% month-on-month, exceeding the expected 0.2% rise and July’s 0.2% decline.

Technical Analysis: USD/JPY Drops to Near 141.50; Next Support at 14-Month Lows

USD/JPY is trading around 141.40 on Wednesday. Technical analysis of the daily chart reveals that the pair is trending downward within a descending channel, indicating a bearish outlook. The 14-day Relative Strength Index (RSI) has climbed above the 30 level, suggesting the possibility of a near-term upward correction.

The immediate support for USD/JPY pair may be found at 139.58, which marks the lowest level since June 2023. Further support lies at the lower boundary of the descending channel, around 138.20.

On the upside, resistance may first appear at the nine-day EMA near 142.14, followed by the 21-day EMA around 143.72. A突破 these EMAs could diminish bearish sentiment and potentially drive the pair toward the upper boundary of the descending channel at 145.10.

The Japanese yen pares its gains as the Fed interest rate decision approaches

USD/JPY: Daily Chart

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