Japanese Yen extends losses, while US Dollar improves due to hawkish Fed

• The Japanese Yen depreciates due to hawkish sentiment surrounding the Fed maintaining higher rates for longer.
• Japanese Finance Minister Shunichi Suzuki voiced worries regarding the adverse effects of the weak Japanese Yen.
• The US Dollar remains firmer amid higher US Treasury yields.

The Japanese Yen (JPY) lost ground for the fourth consecutive session on Tuesday, driven by the significant interest rate differential between Japan and the United States (US). This pressure on the JPY has bolstered the USD/JPY pair. Market sentiment emerges that the Bank of Japan (BoJ) may raise interest rates earlier than expected against the backdrop of the weak JPY.

Japanese Finance Minister Shunichi Suzuki expressed concerns about the negative implications of the weak JPY. Suzuki also said that market discussions are centered on long-term rates as they increase, focusing on appropriate national debt policies in Japan. There are hopes for wage hikes to surpass the inflation pace. He stated that he is closely monitoring FX movements.

The US Dollar (USD) trades steadily, as there were no major economic data releases from the United States (US). The higher US Treasury yields have provided support to the Greenback. The US Federal Reserve (Fed) remains cautious about inflation and the possibility of rate cuts in 2024.

Daily Digest Market Movers: Japanese Yen depreciates due to the hawkish Fed

• A BoJ survey showed on Monday that approximately 70% of firms reported experiencing drawbacks from the BoJ's 25-year-long monetary easing measures, notably citing a weak JPY that increased import costs. However, around 90% of the firms also acknowledged benefits stemming from the BoJ's prolonged easing, including low borrowing costs. Among Japan's large manufacturers, exchange rate stability emerged as the primary factor they desired from the central bank's monetary policy.
• The yield on the 2-year Japanese government bond stands at 0.34%, according to FactSet. This means policy rates are predicted to reach 0.25% in the second half of the year and 0.5% next year.
• On Monday, Loretta Mester, President of the Federal Reserve Bank of Cleveland, told Bloomberg that she no longer believes three rate cuts in 2024 are appropriate. Mester highlighted that inflation risks are skewed to the upside and emphasized that there is no harm in spending additional time gathering data on inflation, given the strength of the economy.
• According to the CME FedWatch Tool, the probability of the Federal Reserve implementing a 25 basis-point rate cut in September has seen a slight uptick to 49.6%, compared to 48.6% a week ago.
• Market sentiment emerges that the BoJ might reduce bond purchases at the June policy meeting. BOJ Governor Kazuo Ueda also indicated that there are no immediate plans to sell the central bank’s ETF holdings.

Technical Analysis: USD/JPY rises to around a major level of 156.50

The Japanese Yen trades around 156.50 against its counterpart US Dollar on Tuesday. The daily chart for USD/JPY showed an ascending triangle formation. Additionally, the 14-day Relative Strength Index (RSI) indicated a bullish sentiment, holding slightly above the 50 mark.

The USD/JPY pair could retest the upper boundary of the ascending triangle around the psychological barrier at 157.00. A break above this level could support the pair to approach the high of 160.32, a level never seen since April 1990.

On the downside, the lower threshold of the ascending triangle appears as the immediate support, around the major level of 155.50, followed by the 21-day Exponential Moving Average (EMA) at 155.25. A break below this level could exert downward pressure on the USD/JPY pair to move toward the throwback support at 153.60.

USD/JPY: Daily Chart