Japanese Yen gains ground due to a potential rate hike by the BoJ

• The Japanese Yen appreciates as BoJ could increase rates by 10 basis points on Wednesday.
• The Bank of Japan is widely expected to announce its bond purchase tapering plans.
• The US Dollar depreciates as signs of cooling inflation have fueled the odds of three rate cuts by the Fed in 2024.

The Japanese Yen (JPY) continues to gain ground on Monday as traders remain cautious ahead of the Bank of Japan’s (BoJ) policy meeting on Wednesday which could see a potential rate hike. Markets are betting that the BoJ may lift rates by 10 basis points to 0.1% and is widely expected to announce its bond purchase tapering plans.

The JPY may also receive support as traders potentially unwind their carry trades ahead of the Bank of Japan's policy decision. Japan's top currency diplomat, Masato Kanda, informed the G20 on Friday that foreign exchange (FX) volatility negatively impacts the Japanese economy. Kanda noted an increasing likelihood of a soft landing and emphasized the need to monitor the economy and implement necessary measures closely, according to Reuters.

The US Dollar (USD) faces challenges as cooling inflation and easing labor market conditions in the United States (US) have fueled expectations of three rate cuts this year by the Federal Reserve (Fed), starting in September.

Daily Digest Market Movers: Japanese Yen improves due to expected rate hikes by the BoJ

• Reuters has published an extensive article on the Bank of Japan (BOJ) review of past policy, highlighting a significant shift in the central bank's approach to inflation. The key message from the review is that Japan is "ready for higher rates." However, the review will not result in changes to the price goal or policy framework.
• On Friday, the US Personal Consumption Expenditures (PCE) Price Index rose by 2.5% year-over-year in June, down slightly from 2.6% in May, meeting market expectations. On a monthly basis, the PCE Price Index increased by 0.1% after being unchanged in May.
• The US Core PCE inflation, which excludes volatile food and energy prices, also climbed to 2.6% in June, consistent with May's increase and above the forecast of 2.5%. The core PCE Price Index rose by 0.2% month-over-month in June, compared to 0.1% in May.
• 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.
• Last week, 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 BlackRock Investment Institute noted in its mid-year outlook that Japan’s that the Bank of Japan will not raise interest rates at next week's meeting. Additionally, JP Morgan has also anticipated no rate hike from the Bank of Japan (BoJ) in July or at any point in 2024.

Technical Analysis: USD/JPY falls toward 153.00

USD/JPY trades around 153.20 on Monday. The daily chart analysis shows that the USD/JPY pair tests the descending channel, indicating a potential strengthening of the bearish bias. Additionally, the 14-day Relative Strength Index (RSI) is below the 30 level, signaling an oversold situation and suggesting a potential short-term rebound.

A break below the lower boundary of the descending channel around the level of 153.00 could exert downward pressure, potentially pushing the USD/JPY pair to revisit May's low of 151.86. Additional support may be found at the psychological level of 151.00.

On the upside, the USD/JPY pair may test the "throwback support turned resistance" around 154.50. Further resistance is likely at the nine-day Exponential Moving Average (EMA) of 155.24, followed by the upper boundary of the descending channel near 156.20.

USD/JPY: Daily Chart