Japanese Yen comes under pressure following Tokyo CPI

• The Japanese Yen struggles after the release of the Tokyo CPI data on Friday.
• The JPY’s downside may be limited as traders may continue unwinding their carry trades ahead of the BoJ meeting.
• The US Dollar appreciates as recent US economic data have reduced rate cut expectations for September.

The Japanese Yen (JPY) extends its losses against the US Dollar (USD) on Friday after the Statistics Bureau of Japan released the Tokyo Consumer Price Index (CPI) data. However, the Yen’s decline might be restrained as traders potentially unwind their carry trades ahead of the Bank of Japan's two-day policy meeting, concluding on Wednesday. During the meeting, the board will discuss the possibility of raising interest rates and outline details on tapering its extensive bond purchases.

Japan's top currency diplomat, Masato Kanda, informed the G20 on Friday that foreign exchange (FX) volatility negatively impacts the Japanese economy. He noted an increasing likelihood of a soft landing and emphasized the need to closely monitor the economy and implement necessary measures, according to Reuters.

The US Dollar received support as stronger US economic data have reduced some rate cut expectations for September. On Friday, attention will be on the release of the Personal Consumption Expenditures (PCE) Price Index for June.

On Thursday, the US Gross Domestic Product (GDP) for the second quarter (Q2) was stronger than expected. This follows Wednesday’s US PMI data, which indicated a faster expansion in private-sector activity for July, highlighting the resilience of US growth despite elevated interest rates.

Daily Digest Market Movers: Japanese Yen declines after the inflation data

• The headline Tokyo CPI for July increased by 2.2% year-over-year, slightly down from the previous 2.3% rise. The Tokyo CPI excluding Fresh Food and Energy went up by 1.5% YoY, compared to the earlier increase of 1.8%. Moreover, the CPI excluding Fresh Food also rose by 2.2% in July, matching market expectations.
• Bank of America indicates that strong economic growth in the United States allows the Federal Open Market Committee (FOMC) to "afford to wait" before making any changes. The bank states that the economy "remains on robust footing" and continues to expect the Fed to start cutting rates in December.
• According to CME Group’s FedWatch Tool, markets now indicate an 88.6% probability of a 25-basis point rate cut at the September Fed meeting, up from 94.0% a week earlier.
• On Thursday, the US GDP grew at an annualized rate of 2.8%, adjusted for seasonality and inflation, up from the previous reading of 1.4% and surpassing forecasts of 2%. Additionally, Initial Jobless Claims fell to 235K in the week ending July 19, compared to the previous reading of 243K and the expected 238K.
• On Wednesday, Japanese Finance Minister Shunichi Suzuki, Chief Cabinet Secretary Yoshimasa Hayashi, and top currency diplomat Masato Kanda avoided commenting on foreign exchange matters, according to Reuters.
• The Japanese Cabinet Office kept its economic assessment unchanged for July but cautioned about a bleak outlook, noted in its monthly report on Thursday. The government also downgraded its evaluation of exports, indicating that they are stagnating.
• The BlackRock Investment Institute noted in its mid-year outlook that Japan’s economic recovery and rising inflation make its equity market one of its strongest convictions. The firm anticipates that the Bank of Japan will not raise interest rates at next week's meeting.
• Reuters reported on Monday that a senior official in the ruling party, Toshimitsu Motegi urged the Bank of Japan (BoJ) to more clearly communicate its plan to normalize monetary policy through gradual interest rate hikes, according to Reuters. Prime Minister Fumio Kishida added that normalizing the central bank’s monetary policy would support Japan's transition to a growth-driven economy.
• JP Morgan has anticipated no rate hike from the Bank of Japan (BoJ) in July or at any point in 2024. A July rate increase is not their base case, and they do not expect any hikes for the remainder of 2024. They believe it is too early to adopt a bullish stance on the Yen.

Technical Analysis: USD/JPY hovers around 154.00

USD/JPY trades around 154.00 on Friday. The daily chart analysis shows that the USD/JPY pair has returned to the descending channel, indicating the weakening of a dovish bias. However, the 14-day Relative Strength Index (RSI) is positioned at the level of 30, indicating an oversold situation and a potential short-term rebound.

The USD/JPY pair may test the lower boundary of the descending channel around the level of 153.50, followed by May's low of 151.86 level. Further support could be found at the psychological level of 151.00.

On the upside, the USD/JPY pair may test the “throwback support level turned resistance” around the 154.50 level. Further resistance appears at the nine-day Exponential Moving Average (EMA) of 155.80, followed by the upper boundary of the descending channel around 156.60.

USD/JPY: Daily Chart