Japanese Yen rises due to increasing odds of a further BoJ rate hike

• The Japanese Yen advances as traders expect the BoJ to implement another rate hike in the near term.
• Japan’s Machinery Orders rose by 2.1% MoM in June, surpassing the expected 1.1% rise.
• The US Dollar loses ground as dovish Fedspeak raises odds of a Fed rate cut in September.

The Japanese Yen (JPY) appreciates for the second consecutive day against the US Dollar (USD), driven by hawkish sentiment surrounding the Bank of Japan (BoJ). Recent data showing growth in Japan’s second-quarter GDP supports the potential for an interest rate hike by the BoJ in the near term.

Japan’s Machinery Orders, a key indicator of capital expenditure, increased by 2.1% month-on-month in June, surpassing the forecasted 1.1% rise. Markets are now anticipating Japanese inflation figures later this week for further insight into the Bank of Japan’s monetary policy direction.

The US Dollar continues to lose ground following dovish comments from Federal Reserve (Fed) officials, which have heightened expectations for an interest rate cut by the US central bank in September. Additionally, last week’s US economic data showed that both the Producer Price Index (PPI) and Consumer Price Index (CPI) indicate that inflation is easing.

Federal Reserve Bank of San Francisco President Mary Daly emphasized Sunday that the US central bank should take a gradual approach to reducing borrowing costs, according to the Financial Times. Additionally, Federal Reserve Bank of Chicago President Austan Goolsbee warned that central bank officials should be cautious about keeping a restrictive policy in place longer than necessary.

Daily Digest Market Movers: Japanese Yen appreciates due to a hawkish BoJ

• On Friday, US Housing Starts dropped by 6.8% in July to 1.238 million units, following a 1.1% increase in June. Meanwhile, the University of Michigan’s Consumer Sentiment Index rose to 67.8 in August, showing its first increase in five months, surpassing expectations and up from 66.4 in July.
• The US Census Bureau reported on Thursday that US Retail Sales climbed 1.0% month-over-month in July, a sharp turnaround from June's 0.2% decline, surpassing the projected 0.3% increase. Moreover, Initial Jobless Claims for the week ending August 9 reached 227,000, lower than the forecast of 235,000 and down from 234,000 the previous week.
• On Thursday, Japanese Economy Minister Yoshitaka Shindo stated that the economy is anticipated to recover gradually as wages and income improve. Shindo also added that the government will collaborate closely with the Bank of Japan to implement flexible macroeconomic policies.
• Japan's Gross Domestic Product (GDP) grew by 0.8% quarter-on-quarter in Q2, surpassing market forecasts of 0.5% and rebounding from a 0.6% decline in Q1. This marked the strongest quarterly growth since Q1 of 2023. Meanwhile, the annualized GDP growth reached 3.1%, exceeding the market consensus of 2.1% and reversing a 2.3% contraction in Q1. This was the strongest yearly expansion since Q2 of 2023.
• US headline Consumer Price Index (CPI) rose 2.9% year-over-year in July, slightly down from the 3% increase in June and below market expectations. The Core CPI, which excludes food and energy, climbed 3.2% year-over-year, a slight decrease from the 3.3% rise in June but aligned with market forecasts.
• Rabobank's senior FX strategist, Jane Foley, observes that this week's series of US data releases, along with next week's Jackson Hole event, should provide the market with clearer insights into the potential responses of US policymakers. However, their main expectation is that the Fed will reduce rates by 25 basis points in September and likely cut them again before the end of the year.

Technical Analysis: USD/JPY falls to near 146.50

USD/JPY trades around 146.40 on Monday. Daily chart analysis indicates that the pair is slightly below the nine-day Exponential Moving Average (EMA), signaling a short-term bearish trend. Additionally, the 14-day Relative Strength Index (RSI) remains below 50, confirming the bearish momentum.

For support levels, the USD/JPY pair may test the area around its seven-month low of 141.69, reached on August 5. A further decline could push the pair toward the next “throwback support” level at 140.25.

On the upside, the USD/JPY pair could face an immediate barrier around the nine-day Exponential Moving Average (EMA) at 147.60. A break above this level might see the pair targeting the 50-day EMA at 152.78, with the potential to test the resistance level at 154.50, which has shifted from previous throwback support to current pullback resistance.

USD/JPY: Daily Chart