Japanese Yen recovers losses ahead of Fed Powell's second testimony

• The Japanese Yen struggles as the US Dollar gains momentum after Fed Chair Jerome Powell's testimony on Tuesday.
• The Bank of Japan is poised to assess a viable strategy for scaling back its government bond purchases.
• Powell stated that a rate cut is not appropriate until the Fed gains confidence that inflation is moving toward 2%.

The Japanese Yen (JPY) depreciates for the third successive session on Wednesday. The rise in the USD/JPY pair is driven by the strengthening US Dollar (USD), which gained momentum after Federal Reserve Chairman Jerome Powell's testimony before the US Congress on Tuesday. Powell noted improved inflation figures but maintained the Fed's cautious approach.

The Bank of Japan (BoJ) may raise interest rates during its July meeting and unveil plans to taper its bond purchases. On Tuesday, Japan's Finance Minister Shunichi Suzuki underscored the significance of maintaining fiscal discipline to bolster confidence in long-term fiscal health. Suzuki also mentioned monitoring closely the discussions at the BoJ meeting concerning the bond market, as reported by Reuters.

Traders anticipate several key events in the financial markets. These include Fed Chair Jerome Powell's second semi-annual testimony, speeches by Fed officials Michelle Bowman and Austan Goolsbee, and the release of US Consumer Price Index (CPI) data scheduled for Thursday.

Daily Digest Market Movers: Japanese Yen declines due to the hawkish stance of Fed’s Powell

• Japan's Producer Price Index (YoY) rose by 2.9% in June, accelerating from an upwardly revised 2.6% increase in the previous month, in line with market expectations. This marks the 41st consecutive month of rise in producer inflation and represents the highest level since August 2023.
• Fed Chair Jerome Powell stated in his Congressional testimony on Tuesday, "More good data would strengthen our confidence in inflation." Powell emphasized that a "Policy rate cut is not appropriate until the Fed gains greater confidence that inflation is headed sustainably toward 2%." He also noted that "first-quarter data did not support the greater confidence in the inflation path that the Fed needs to cut rates."
• According to a Bloomberg report on Tuesday, the Bank of Japan is conducting three in-person meetings with banks, securities firms, and financial institutions over the next few days. The purpose of these meetings is to assess a feasible pace for scaling back its purchases of Japanese Government Bonds.
• The Japanese Yen struggles due to overseas asset purchases by Japanese individuals through the newly revamped tax-free investment scheme, the Nippon Individual Savings Account (NISA) program. According to Nikkei Asia, the scale of these purchases is expected to exceed the country's trade deficit during the first half of this year.
• Japan’s Ministry of Finance reported on Monday that Japanese investment trust management companies and asset management firms bought ¥6.16 trillion ($38 billion) more in offshore equities and investment fund shares than they sold during the first six months of the year.
• On Monday, the Bank of Japan (BOJ) maintained its economic assessment for five of Japan's nine regions in its latest 'Sakura Report'. The assessment for two regions was raised, while it was lowered for another two regions in the report released on Monday. Regarding price trends, the BoJ noted that many regions report wage hikes spreading among smaller firms.

Technical Analysis: USD/JPY rises to near 161.50

USD/JPY trades around 161.50 on Wednesday. The pair is maintaining its upward trajectory within an ascending channel pattern, suggesting a bullish bias according to daily chart analysis. Adding to this bullish outlook, the 14-day Relative Strength Index (RSI) remains above the 50 level, reinforcing the strength of the upward trend.

Looking ahead, the USD/JPY pair may target a critical resistance level near 162.70, positioned at the upper boundary of the ascending channel. A successful breakout above this level could bolster bullish sentiment, potentially propelling the pair toward the psychological resistance at 163.00.

On the downside, initial support for the USD/JPY pair is anticipated around the 21-day Exponential Moving Average (EMA) at 159.96. A breach below this level might exert pressure, prompting a test of the lower boundary of the ascending channel around 159.60. Further decline below this channel support could lead the pair toward the vicinity of June's low at 154.55.

USD/JPY: Daily Chart