Japanese Yen gains ground as US Dollar remains subdued ahead of Fed interest rate decision

• The Japanese Yen appreciates due to ongoing hawkish sentiment surrounding the BoJ interest rate outlook.
• Japan's Merchandise Trade Balance Total recorded a trade deficit of ¥695.3 billion in August, below the expected ¥1,380.0 billion shortfall.
• The US Dollar receives downward pressure from rising odds of a 50 basis point cut by the Fed on Wednesday.

The Japanese Yen (JPY) retraces its losses against the US Dollar due to rising expectations of a 50 basis point Federal Reserve (Fed) rate cut on Wednesday. Traders will shift their focus on the BoJ policy decision on Friday, with expectations of keeping rates unchanged while leaving the possibility open for further rate hikes.

Japan’s Merchandise Trade Balance Total recorded a larger trade deficit of ¥695.30 billion in August, up from ¥628.70 billion the previous month, but well below market expectations of a ¥1,380.0 billion shortfall. Exports increased by 5.6% year-over-year, marking the ninth consecutive month of growth, but fell short of the anticipated 10.0%. Imports rose by just 2.3%, the slowest pace in five months, significantly underperforming the projected 13.4% rise.

The US Dollar remains under pressure amid rising expectations that the Federal Open Market Committee (FOMC) may announce a substantial 50 basis point rate cut on Wednesday. The CME FedWatch Tool indicates that markets are assigning a 33.0% probability to a 25-basis-point rate cut, while the likelihood of a 50-basis-point cut has risen to 67.0%, up from 62.0% just the previous day.

Daily Digest Market Movers: Japanese Yen appreciates due to the dovish Fed policy outlook

• Japanese Finance Minister Shunichi Suzuki stated on Tuesday that rapid foreign exchange (FX) fluctuations are undesirable. Suzuki emphasized that officials will closely monitor how FX movements affect the Japanese economy and people's livelihoods. The government will continue to assess the impact of a stronger Japanese Yen and respond accordingly, according to Reuters.
• Rabobank economists Jane Foley and Molly Schwartz highlighted on Monday that JPY net long positions were at their highest level since October 2016. While there is minimal expectation for a rate hike by the Bank of Japan at its policy meeting on September 20, traders will be closely watching for any hints that October could potentially be a more active meeting.
• Commerzbank FX analyst Volkmar Baur anticipated that the Bank of Japan will remain on the sidelines this week. Baur noted that the Federal Reserve's actions are likely to have a greater impact on the USD/JPY pair, suggesting that the JPY could have a strong chance of falling below 140.00 per USD even without a rate hike from the BoJ.
• On Friday, Fitch Ratings' latest report on the Bank of Japan's policy outlook suggests that the BoJ might raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by the end of 2026.
• The University of Michigan’s Consumer Sentiment Index rose to 69.0 in September, exceeding the market expectations of 68.0 reading and marking a four-month high. This increase reflects a gradual improvement in consumers' outlook on the US economy after months of declining economic expectations.
• The hawkish BoJ policymaker Naoki Tamura stated on Thursday that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. This comment reinforces the BoJ's commitment to ongoing monetary tightening.
• The US Producer Price Index (PPI) rose to 0.2% month-on-month in August, exceeding the forecasted 0.1% increase and the previous 0.0%. Meanwhile, core PPI accelerated to 0.3% MoM, against the expected 0.2% rise and July’s 0.2% decline.

Technical Analysis: USD/JPY falls to near 141.50; next support at 14-month lows

USD/JPY trades around 141.40 on Wednesday. Analysis of the daily chart shows that the pair is trending downward within a descending channel, confirming a bearish outlook. The 14-day Relative Strength Index (RSI), a momentum indicator, has risen above the 30 level, suggesting the potential for an upward correction in the near future.

In terms of support, the USD/JPY pair may encounter immediate support at 139.58, the lowest level since June 2023. This is followed by the lower boundary of the descending channel around 138.20.

On the upside, the USD/JPY pair may first face resistance at the nine-day EMA near the 142.14 level, followed by the 21-day EMA around 143.72. A break above these EMAs could weaken the bearish sentiment, potentially driving the pair to test the upper boundary of the descending channel at 145.10.

USD/JPY: Daily Chart