Japanese Yen ticks lower against USD, remains close to over two-month low ahead of US PPI

• The Japanese Yen fails to build on the overnight strength amid the BoJ rate hike uncertainty.
• A positive risk tone also undermines the JPY, though subdued USD demand helps limit losses.
• The fundamental backdrop suggests that the path of least hurdle for the JPY is to the downside.

The Japanese Yen (JPY) ticks lower during the Asian session on Friday and for now, seems to have stalled the previous day's modest bounce against its American counterpart from the lowest level since early August. Investors have been scaling back their bets for additional interest rate hikes by the Bank of Japan (BoJ) in 2024 after Japanese Prime Minister Shigeru Ishiba's comments, saying that the country is not in an environment for more rate increases. This, along with a positive risk tone, undermines the safe-haven JPY ahead of Japan's snap election on October 27 and offers some support to the USD/JPY pair. 

Meanwhile, the US Dollar (USD) is seen oscillating in a range below a nearly two-month peak touched on Thursday and does little to provide any meaningful impetus to the USD/JPY pair. Investors now seem convinced that signs of labor market weakness should allow the Federal Reserve (Fed) to continue cutting interest rates. That said, the hotter-than-expected US consumer inflation figures released on Thursday eliminate the possibility of another oversized rate cut in November. This, in turn, holds back traders from placing aggressive USD directional bets ahead of the US Producer Price Index (PPI).

Daily Digest Market Movers: Japanese Yen drifts lower amid fading hopes for more BoJ rate hikes

• Expectations that the Bank of Japan will be in no rush to lift borrowing costs fail to assist the Japanese Yen to capitalize on its modest recovery against the US Dollar, from over a two-month low touched on Thursday.
• Furthermore, political uncertainty ahead of a snap election on October 27 in Japan, along with a generally positive risk tone, could undermine demand for the JPY and continue to act as a tailwind for the USD/JPY pair. 
• The US Dollar shot to its highest level since mid-August after the US Labor Department reported that the core Consumer Price Index, which excludes food and energy prices, rose 3.3% on a yearly basis in September. 
• Meanwhile, the headline CPI climbed 2.4% in the 12 months through September vs. 2.3% expected. This, however, was lower than the 2.5% in August and also the smallest year-on-year rise since February 2021.
• Furthermore, the number of Americans seeking unemployment benefits surged 33,000, to a seasonally adjusted 258,000 for the week ended October 5 and pointed to initial signs of weakness in the US labor market. 
• Investors now seem convinced that the Federal Reserve will continue cutting interest rates, which keeps the USD bulls on the defensive ahead of the release of the US Producer Price Index (PPI), due later this Friday.

Technical Outlook: USD/JPY technical setup seems tilted in favor of bulls, the 149.00 mark holds the key

From a technical perspective, last week's move beyond the 50-day Simple Moving Average (SMA) for the first time since mid-July and acceptance above the 38.2% Fibonacci retracement level of the July-September downfall favors bulls. Moreover, oscillators on the daily chart have been gaining positive traction and are far from being in the overbought territory, suggesting that the path of least resistance for the USD/JPY pair is to the upside. Hence, any subsequent fall is more likely to attract fresh buyers and should remain limited near the 148.00 mark. 

The latter should act as a key pivotal point, which if broken might prompt some technical selling and drag the USD/JPY pair to the 147.35 intermediate support en route to the 147.00 mark and the 146.50 area. On the flip side, the 149.00 round figure now seems to act as an immediate hurdle ahead of the overnight swing high, around the 149.55-149.60 region, above which bulls might aim to reclaim the 150.00 psychological mark. The momentum could extend further towards the 50% Fibo. level, around the 150.75-150.80 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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