Japanese Yen bounces off multi-decade low against USD, lacks follow-through

• The Japanese Yen draws some support from the possibility of a government intervention.
• The divergent BoJ-Fed expectations and easing Middle East tensions cap the safe-haven JPY.
• Traders also seem reluctant ahead of the key US macro data and BoJ meeting later this week.

The Japanese Yen (JPY) ticks higher against its American counterpart during the Asian session on Tuesday and recovers a major part of the previous day's losses to a fresh 34-year low, though any meaningful recovery still seems elusive. Investors remain on alert amid speculations that Japanese authorities will intervene to prop up the domestic currency, which, in turn, is seen lending some support to the JPY. The upside potential, however, seems limited in the wake of expectations that the difference in rates between the US and Japan will stay wide for some time.

The Bank of Japan (BoJ) has indicated that it is in no rush in terms of policy normalization and is expected to wait until October before hiking interest rates again. In contrast, investors have been paring back their bets about interest rate cuts by the Federal Reserve (Fed) amid sticky inflation. Hawkish Fed expectations, meanwhile, remain supportive of elevated US Treasury bond yields and continue to underpin the US Dollar (USD). Apart from this, cooling Middle East tensions should cap gains for the safe-haven JPY and act as a tailwind for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen might struggle to attract buyers amid BoJ's uncertain rate outlook

• Japan's Finance Minister Shunichi Suzuki, along with other policymakers, said that they are watching currency moves closely and will respond as needed, providing some respite to the Japanese Yen.
• The flash PMIs released from Japan on Tuesday showed that overall business activity improved substantially at the beginning of the second quarter, albeit did little to impress the JPY bulls.
• The au Jibun Bank Japan Manufacturing PMI moved closer to breaking back into expansionary territory and improved from 48.2 to 49.9 in April – marking the strongest reading since June 2023.
• The gauge for the services sector came in at 54.6 for the reported month as compared to 54.1 in March, suggesting that demand remained strong despite weakness in other aspects of the economy.
• Following last month’s historic decision to end the negative rate policy and Yield Curve Control (YCC) program, the Bank of Japan is expected to keep its short-term interest target unchanged on Friday.
• Moreover, the BoJ is anticipated to adopt a data-dependent approach in deciding the next interest rate hike amid uncertainties on whether wage hikes will broaden and drive up consumer prices.
• Investors pushed back their expectations about the timing of the first rate cut by the Federal Reserve to September and downsized the number of rate-cuts this year to less than two amid sticky inflation.
• Adding to this, the recent hawkish remarks by FOMC members allow the US Dollar to stand tall near its highest level since November touched last week and act as a tailwind for the USD/JPY pair.
• Traders now look to the flash US PMIs for some impetus, though the focus remains on the Advance US Q1 GDP on Thursday and the Personal Consumption Expenditures (PCE) Price Index on Friday.

Technical Analysis: USD/JPY needs to consolidate before the next leg up, 155.00 hold the key for bullish traders

From a technical perspective, the Relative Strength Index (RSI) is still flashing overbought conditions on the daily chart and holding back the USD/JPY pair from placing fresh bets. Any further slide, however, is more likely to attract some dip-buyers near the 154.35-154.30 region. This should help limit the downside for spot prices near the 154.00 mark, which if broken might expose last Friday's swing low, around the 153.60-153.55 zone. The next relevant support is pegged near the 153.25-153.20 area and the 153.00 mark. A convincing break below the latter could prompt aggressive technical selling and drag the pair to the 152.50 intermediate support en route to a short-term trading range resistance breakpoint near the 152.00 round figure.

On the flip side, the multi-decade high, around the 154.85 region touched on Monday, followed by the 155.00 psychological mark, could act as an immediate hurdle. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders and set the stage for an extension of a well-established appreciating trend from the March monthly swing low.