Japanese Yen remains depressed against USD, seems vulnerable near weekly low

• The USD/JPY pair extends the overnight turnaround from over a one-week low. 
• Fading safe-haven demand, along with the BoJ uncertainty, undermines the JPY. 
• Bets for a less aggressive Fed easing lend some support to the USD and the pair.

The Japanese Yen (JPY) continues losing ground against its American counterpart during the Asian session on Wednesday and assists the USD/JPY pair to build on the previous day's goodish rebound from over a one-week low. Despite the risk of a further escalation in the Russia-Ukraine conflict, easing fears about the onset of a full-blown nuclear war boosts investors' confidence. This, along with the uncertainty over the timing of another interest rate hike by the Bank of Japan (BoJ), turn out to be key factors undermining the JPY.

Meanwhile, US President-elect Donald Trump's policies could spur economic growth and boost inflation, which might limit the scope for the Federal Reserve (Fed) to cut interest rates. Apart from this, receding safe-haven demand triggers a fresh leg up in the US Treasury bond yields, which, in turn, helps revive the US Dollar (USD) and offers additional support to the USD/JPY pair. That said, intervention fears might hold back the JPY bears from placing aggressive bets and keep a lid on a meaningful appreciating move for the currency pair. 

Japanese Yen is undermined by a combination of factors; fails to gain respite from intervention fears 

• Russian President Vladimir Putin approved the change to the country's nuclear doctrine on Tuesday, days after US President Joe Biden authorized Ukraine to use long-range American missiles against military targets inside Russia.
• Russian Foreign Minister Sergei Lavrov said the country would do everything possible to avoid the onset of a nuclear war and called Germany's decision on Monday not to provide long-range missiles to Ukraine a responsible position.
• Meanwhile, the White House said that the United States (US) does not plan to adjust its own nuclear posture in response to Russia's move, which, in turn, tempered safe-haven demand and weighed on the Japanese Yen. 
• Bank of Japan Governor Kazuo Ueda earlier this week warned against keeping borrowing costs too low and signaled another interest rate increase, was vague on the timing and offered no hints about a hike in December.
• A report published by the Ministry of Finance earlier this Wednesday showed that Japan's total exports increased by 3.1% and imports grew by 0.4% from a year earlier in October, resulting in a trade deficit of ¥461.2 billion.
• Market participants have been anticipating slightly higher inflation after former President Donald Trump’s election victory, which was seen as a key trigger behind the recent sharp move up in the US Treasury bond yields. 
• Federal Reserve Bank of Kansas President Jeffrey Schmid noted on Tuesday that large fiscal deficits will not cause inflationary pressures because the central bank will prevent it, though that could mean higher interest rates.
• The US Dollar consolidates its recent pullback from the year-to-date high and languishes near the weekly low, albeit, the downside remains cushioned in the wake of expectations of a less aggressive easing by the Fed. 
• Scheduled speeches by a slew of influential FOMC members later this Wednesday will influence the USD price dynamics and provide some impetus to the USD/JPY pair in the absence of any relevant US macro data.

USD/JPY seems poised to climb further and aim to retest multi-month high set last week

From a technical perspective, the USD/JPY pair's overnight strong rebound suggests that the recent corrective slide from a multi-month high has run its course. The subsequent move up, along with the positive oscillators on the daily chart, supports prospects for a further appreciating move for spot prices. Bulls, however, need to wait for a sustained strength above the 155.00 mark before placing fresh bets. 

Some follow-through buying beyond the weekly top, around the 155.35 area, will reaffirm the positive outlook and lift the USD/JPY pair to the 155.70 intermediate hurdle en route to the 156.00 round-figure mark. The momentum could extend further towards retesting the multi-month top, around the 156.75 region touched last Friday.

On the flip side, the 154.40-154.35 area now seems to protect the immediate downside ahead of the 154.00 mark. Any further decline might continue to find decent support near the 153.30-153.25 region, or the overnight swing low. This is followed by the 153.00 round figure and the next relevant support near the 152.70-152.65 area, below which the USD/JPY pair could drop to the very important 200-day Simple Moving Average (SMA), around the 151.90-151.85 region.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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