The Japanese Yen weakens as the Bank of Japan shows no urgency to raise interest rates

The Japanese Yen (JPY) extended its losses for a third straight session in light holiday trading on Monday, driven by increasing concerns that the Bank of Japan (BoJ) is not in a hurry to raise interest rates.

During its Friday meeting, the BoJ kept its interest rate target within the 0.15-0.25% range. BoJ Governor Kazuo Ueda reiterated that the central bank "will continue adjusting the level of monetary easing as needed to achieve our economic and inflation objectives." He noted that while Japan's economy is gradually recovering, underlying weaknesses persist.

Meanwhile, the US Dollar (USD) continues to strengthen, buoyed by the recovery in Treasury yields. However, the Greenback could face pressure as expectations grow for additional rate cuts by the US Federal Reserve (Fed) in 2024. According to the CME FedWatch Tool, markets are currently pricing in a 50% probability of a 50 basis point rate cut, bringing rates down to 4.0-4.25% by the end of the year.

Daily Digest Market Movers: Japanese Yen Weakens Amid Concerns of BoJ Delaying Rate Hikes

• Japan's new "top currency diplomat," Atsushi Mimura, mentioned in an interview with NHK that most of the Yen carry trades from the past have likely been unwound. However, he warned that a resurgence in these trades could increase market volatility. "We are constantly monitoring the markets to prevent such occurrences," Mimura added.

• On Friday, Philadelphia Fed President Patrick Harker likened monetary policy to driving a bus, emphasizing the importance of controlling speed as the US central bank navigates a challenging economic environment. Harker expressed confidence in the Fed’s handling of recent economic pressures.

• Japan’s Finance Minister, Shunichi Suzuki, said on Friday that the government "will continue to monitor and analyze the impact of the recent US rate cut on Japan's economy and financial markets." He also noted that the Federal Reserve Bank's (FRB) view of the US economy aligns with Japan’s expectation of continued US economic expansion.

• Japan's Consumer Price Index (CPI) climbed to 3.0% year-over-year in August, up from 2.8% and marking the highest level since October 2023. The Core National CPI, excluding fresh food, also rose to a six-month high of 2.8%, continuing its upward trend for the fourth straight month, in line with market forecasts.

• The Federal Open Market Committee (FOMC) cut the federal funds rate to a range of 4.75% to 5.0%, marking the Fed’s first rate reduction in over four years. Policymakers raised their unemployment forecast to 4.4% by the end of 2024, from 4.0% previously, and adjusted their long-term federal funds rate projection from 2.8% to 2.9%.

• Federal Reserve Chair Jerome Powell explained the decision to implement a 50 basis point rate cut, stating, "This move demonstrates our growing confidence that, with the right policy adjustments, we can maintain a strong labor market, achieve moderate economic growth, and bring inflation down to our target of 2%."

• Japan’s Merchandise Trade Balance showed a larger-than-expected deficit of ¥695.30 billion in August, up from ¥628.70 billion in July, but still better than market forecasts of a ¥1,380.0 billion shortfall. Exports grew by 5.6% year-over-year, marking the ninth consecutive month of growth, though they fell short of the expected 10.0%. Imports rose by just 2.3%, the slowest pace in five months and significantly below the projected 13.4%.

Technical Analysis: USD/JPY Tests Resistance at 144.50, Approaching the Upper Boundary of the Descending Channel

The USD/JPY pair is trading near 144.40 on Monday, continuing its movement within a descending channel. The daily chart indicates that the pair is trending higher, and a breakout above the upper boundary of the channel could signal a shift from a bearish to a bullish bias. The 14-day Relative Strength Index (RSI) is slightly below the 50 level, and a move above this threshold could suggest the emergence of bullish momentum.

On the upside, the immediate resistance is located at the upper boundary of the channel around the 144.70 level. A successful break above this level may enable USD/JPY pair to challenge the psychological 145.00 level.

On the downside, the pair could test the 21-day Exponential Moving Average (EMA) at 143.76, followed by the nine-day EMA at 143.00. A break below this could lead to a further decline, with a potential retest of the 139.58 level, the lowest point since June 2023.

USD/JPY: Daily Chart