Japanese Yen improves as US Dollar struggles due to rising odds of Fed rate cuts

• The Japanese Yen appreciates as US Dollar faces challenges following weaker-than-expected US employment growth data released on Friday.
• Japan's Current Account surplus increased to ¥2,849.9 billion ($17.78 billion) in May, up from the prior ¥2,050.5 billion.
• Friday’s employment data prompted speculation that the Fed could initiate rate cuts sooner.

The Japanese Yen (JPY) extends its gains for the third successive session on Monday. The USD/JPY pair loses ground as US Dollar (USD) struggles following weaker-than-expected US employment growth data released on Friday.

Japan's Current Account surplus extended its growth streak to the 15th month in May. The Ministry of Finance reported on Monday that the current account increased to ¥2,849.9 billion ($17.78 billion) in May, up from ¥2,050.5 billion in the previous month, surpassing market expectations of ¥2,450.0 billion.

US Nonfarm Payrolls (NFP) surpassed market expectations in June, although the pace of growth was slower compared to May. Additionally, the Unemployment Rate also increased in June. These developments have prompted speculation among traders that the Federal Reserve (Fed) could potentially initiate interest rate cuts sooner rather than later.

According to the CME's FedWatch Tool, rate markets are currently pricing in a 70.7% probability of a rate cut in September, up from 64.1% just a week earlier.

Daily Digest Market Movers: Japanese Yen improves due to dovish sentiment surrounding Fed

• Japan's Labor Cash Earnings rose by 1.9% year-on-year in May, marking an acceleration from April's 1.6% increase and achieving the highest level since January. However, this growth rate fell short of market expectations, which had anticipated a 2.1% increase.
• US Nonfarm Payrolls (NFP) increased by 206,000 in June, following a rise of 218,000 in May. This figure surpassed the market expectation of 190,000.
• The US Unemployment Rate edged up to 4.1% in June from 4.0% in May. Meanwhile, Average Hourly Earnings decreased to 3.9% year-over-year in June from the previous reading of 4.1%, aligning with market expectations.
• OCBC strategists Frances Cheung and Christopher Wong observe that the persistent strength of USD/JPY is raising intervention expectations. However, there is speculation that authorities may monitor to what extent they allow for further depreciation before intervening.
• Federal Reserve Bank of Chicago President Austan Goolsbee stated on BBC Radio on Wednesday that bringing inflation back to 2% will take time and that more economic data are needed. However, on Tuesday, Fed Chair Jerome Powell said that the central bank is getting back on the disinflationary path, per Reuters.
• The Minutes from the Federal Reserve's June 11-12 monetary policy meeting, released on Wednesday, suggested that Fed officials were in a wait-and-see mode. "Some participants emphasized the Committee’s data-dependent approach, with monetary policy decisions being conditional on the evolution of the economy rather than being on a preset path."
• Rabobank FX strategists pointed out on Wednesday that yield differentials appear crucial to the USD/JPY outlook. They suggested that FX intervention could be imminent due to the weakness of the Japanese Yen, which is exerting downward pressure on consumer confidence.

Technical Analysis: USD/JPY hovers around 160.50

USD/JPY trades around 160.30 on Monday, showing a bullish inclination based on daily chart analysis. The pair remains within an ascending channel pattern. However, caution is warranted as the 14-day Relative Strength Index (RSI) has dropped below 70, indicating a potential weakening of the ongoing uptrend.

In the short term, USD/JPY could approach resistance near 162.50, which marks the upper boundary of the ascending channel. A breakout above this level might strengthen bullish sentiment, potentially driving the pair toward psychological resistance at 163.00.

On the downside, immediate support is seen around the 21-day Exponential Moving Average (EMA) at 159.62, followed by the lower boundary of the ascending channel around 159.00. A further decline below this channel support could see USD/JPY testing the vicinity of June's low at 154.55.

USD/JPY: Daily Chart