Japanese Yen depreciates, while US Dollar remains solid ahead of Fed policy decision

• The Japanese Yen edges lower as traders favor the US Dollar ahead of the Fed's interest rate decision.
• The Japanese Yen may appreciate as PPI jumped 2.4% YoY in May, exceeding market expectations of a 2.0% rise.
• The US Dollar maintains its position as robust US jobs data for May has diminished the likelihood of a Fed rate cut in September.

The Japanese Yen (JPY) continues its losing streak for the fourth consecutive session on Wednesday. The USD/JPY pair strengthens as investors favor the US Dollar (USD) ahead of the Federal Reserve's (Fed) decision and the release of US inflation figures for May, scheduled for later in the North American trading hours.

The Japanese Yen may receive support due to higher-than-expected Japanese Producer Price Index (PPI) data. Data showed that producer prices jumped 2.4% year-on-year in May, exceeding market expectations of a 2.0% rise, fueling concerns that this might lead to higher consumer inflation.

The Bank of Japan (BoJ) is expected to maintain its monetary policy unchanged on Friday. The interest rate divergence between the US and Japan continues to undermine the Japanese Yen (JPY), creating a tailwind for the USD/JPY pair.

The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against six major currencies, remains strong as robust US jobs data for May has reduced the odds of a Fed rate cut in September. The CME FedWatch Tool indicates that the likelihood of a Fed rate cut in September by at least 25 basis points has decreased to 52%, down from 67% a week earlier.

Daily Digest Market Movers: Japanese Yen declines due to interest rate differential

• Japan Finance Minister Shunichi Suzuki said on Tuesday it is important to continue efforts to achieve economic growth and attain fiscal health to retain confidence in the country's fiscal policy, per Reuters.
• Nearly two-thirds of economists surveyed in a Reuters poll on Tuesday anticipate that the Bank of Japan will opt to commence tapering its monthly bond purchases at Friday's policy meeting. This decision marks a significant initial move aimed at gradually reducing the central bank's burgeoning balance sheet.
• Takeshi Minami, Chief Economist at Norinchukin Research Institute said, "There is no longer any reason to continue large-scale purchases of government bonds since it has been judged that a 2% rise in prices is within reach," per Reuters.
• Japan’s 10-year government bond yield moves below 1% ahead of the Bank of Japan’s (BoJ) policy meeting on Friday. The central bank is expected to maintain its current rate policy, while traders are closely watching for any potential reduction in the bank’s monthly bond purchases.
• On Monday, Japan’s Gross Domestic Product (GDP) Annualized contracted by 1.8% in the first quarter, compared to a previous decline of 2.0%. The figures slightly exceeded market forecasts of a 1.9% decrease. Meanwhile, Japan's GDP (QoQ) shrank by 0.5%, which is in line with the flash data.
• Rabobank suggested in its weekly report that the Federal Reserve may cut rates in September and December, more likely because of a deteriorating economy than because of progress on inflation. This is because they think that the US economy is entering a stagflationary phase with persistent inflation and an economic slowdown that is likely to end in a mild recession later this year.
• According to Reuters, while speaking to parliament last week, Bank of Japan (BoJ) Governor Kazuo Ueda stated that inflation expectations are gradually rising but have yet to reach 2%. Ueda said, "We have been scrutinizing market developments since the March decision. As we proceed to exit our massive monetary stimulus, it's appropriate to reduce bond purchases."

Technical Analysis: USD/JPY hovers around 157.00

USD/JPY trades around 157.20 on Wednesday. Analysis of the daily chart suggests a bullish inclination as the pair consolidates within an ascending channel pattern. Additionally, the 14-day Relative Strength Index (RSI) is above the 50 level, indicating a tendency for upward momentum.

A significant hurdle is noticeable at the psychological level of 158.00. A breakthrough above this level could provide support, potentially guiding the USD/JPY pair toward the upper boundary near 158.80. Further resistance is observed at 160.32, marking its highest level in over thirty years.

On the downside, the lower boundary of the ascending channel is around the 50-day Exponential Moving Average (EMA) at 155.03. A breach below this level might intensify downward pressure on the USD/JPY pair, potentially directing it toward the throwback support area around 152.80.

USD/JPY: Daily Chart