Japanese Yen recovers losses as softer US data reinforce Fed rate cuts this year

• The USD/JPY corrects from a 38-year high of 161.95.
• The Nikkei 225 Index rises to nearly 40,700 points, buoyed by gains seen on Wall Street overnight.
• The US Dollar struggles as lackluster economic data raise expectations of Fed rate cuts in 2024.

The Japanese Yen (JPY) inches higher against the US Dollar (USD) on Thursday. The USD/JPY pair retreated from its peak at 161.95, a level not seen since 1986. Traders remain watchful for significant movements in the JPY and potential intervention by Japanese authorities to prevent excessive depreciation.

The Nikkei 225 Index increases to near 40,700 on Thursday, following gains on Wall Street overnight. The weaker Yen also bolstered equities by enhancing the profit outlook for Japan's export-driven industries.

The US Dollar (USD) faced challenges amid declining US Treasury yields, fueled by lackluster economic data that reinforced expectations of Federal Reserve (Fed) interest rate cuts in 2024. US markets will be closed on Thursday in observance of the Independence Day holiday.

Daily Digest Market Movers: Japanese Yen improves as rising odds of Fed rate cuts

• On Wednesday, Rabobank FX strategists pointed out that yield differentials appear crucial to the USD/JPY outlook. They suggested that FX intervention could be imminent due to the weakness of the Japanese Yen, which is exerting downward pressure on consumer confidence.
• OCBC strategists Frances Cheung and Christopher Wong observe that the persistent strength of USD/JPY is raising intervention expectations. However, there is speculation that authorities may monitor to what extent they allow for further depreciation before intervening.
• US ISM Services PMI fell sharply to 48.8 in June, marking the steepest decline since April 2020. This figure was well below market expectations of 52.5, following a reading of 53.8 in May.
• The ADP Employment report showed that US private businesses added 150,000 workers to their payrolls in June, the lowest increase in five months. This figure fell short of the expected 160,000 and was below the downwardly revised 157,000 in May.
• Federal Reserve Bank of Chicago President Austan Goolsbee stated on BBC Radio on Wednesday that bringing inflation back to 2% will take time and that more economic data are needed. However, on Tuesday, Fed Chair Jerome Powell said that the central bank is getting back on the disinflationary path, per Reuters.
• The Minutes from the Federal Reserve's June 11-12 monetary policy meeting, released on Wednesday, suggested that Fed officials were in a wait-and-see mode. "Some participants emphasized the Committee’s data-dependent approach, with monetary policy decisions being conditional on the evolution of the economy rather than being on a preset path."
• Reuters, citing two government sources on Wednesday, reported that the Japan Ministry of Finance may introduce a new type of floating-rate bond to help investors mitigate the risks from rising bond yields. This move comes as Japanese officials prepare for more rate hikes by the Bank of Japan.
• The Federal Reserve (Fed) Chair Jerome Powell turned slightly dovish on Tuesday. Powell said that the Fed is getting back on the disinflationary path. However, Powell wants to see further evidence before cutting interest rates as the US economy and the labor market remain strong, per Reuters.

Technical Analysis: USD/JPY hovers around 161.50

USD/JPY trades around 161.40 on Thursday, showing a bullish bias according to daily chart analysis. The pair holds near the upper boundary of an ascending channel pattern. However, caution is advised as the 14-day Relative Strength Index (RSI) is above 70, indicating overbought conditions and suggesting a possible correction.

In the near term, USD/JPY may test resistance near 162.10, the upper boundary of the ascending channel. A breakout above this level could strengthen bullish sentiment, potentially pushing the pair toward psychological resistance at 162.50.

On the downside, immediate support is observed around the nine-day Exponential Moving Average (EMA) at 160.68. A break below this level could weaken the bullish outlook, potentially guiding USD/JPY toward the lower boundary of the ascending channel near 158.80. A further decline below this channel support could see the pair navigating the area around June's low at 154.55.

USD/JPY: Daily Chart