Japanese Yen bulls retain control on Trump's tariff talks; USD/JPY drops to three-week low

27 Nov 2024, 03:06 by Haresh Menghani · FXStreet

The Japanese Yen draws haven flows as concerns over Trump’s tariff plans offset BoJ uncertainty.
The USD struggles to lure buyers and drags the USD/JPY pair to a three-week low on Wednesday.
Traders now look to the prelim US Q3 GDP print and the US PCE Price Index for a fresh impetus.

The Japanese Yen (JPY) extends its steady intraday ascent and drags the USD/JPY pair to the 152.20 area, or a three-week low heading into the European session on Wednesday amid subdued US Dollar (USD) price action. US President-elect Donald Trump's tariff threats, along with the worsening Russia-Ukraine conflict, turn out to be key factors driving flows towards the safe-haven JPY.

That said, the uncertainty over the Bank of Japan's (BoJ) ability to hike interest rates further amid increased domestic political uncertainty could act as a headwind for the JPY. Apart from this, the optimism led by a ceasefire deal between Israel and Hezbollah, along with an uptick in the US Treasury bond yields, might cap demand for the lower-yielding JPY ahead of the key US macro data.

Japanese Yen buying interest remains uninterrupted amid trade war fears

Concerns that US President-elect Donald Trump's tariffs would trigger trade wars, and impact the global economy, continue to drive some haven flows towards the Japanese Yen.
Scott Bessent's nomination as the US Treasury secretary provided some respite to US bond investors and dragged the benchmark 10-year US Treasury yield to a two-week low on Monday.
Data released on Tuesday showed broadening service-sector inflation in Japan, keeping the door open for another rate hike by the Bank of Japan at its next policy meeting in December.
Japanese Prime Minister Shigeru Ishiba said on Tuesday that he would ask companies to implement significant wage hikes at the annual "Shuntō" negotiations next spring.
The November FOMC meeting minutes revealed that the Committee could pause its easing of the policy rate and hold it at a restrictive level if inflation remained elevated.
Officials expressed confidence that inflation is easing and the labor market is strong, which should allow the Federal Reserve to cut rates further, albeit at a gradual pace.
According to the CME Group's FedWatch Tool, traders are currently pricing in a 63% chance that the Fed will lower borrowing costs by 25 basis points in December.
The US Dollar struggles to gain any meaningful traction and languishes near the weekly low touched on Tuesday, exerting additional pressure on the USD/JPY pair.
Lebanon-based Hezbollah militant group said that it launched drones towards Israel on Tuesday night, while Israel launched air strikes on Beirut's southern suburbs.
Moments later, US President Joe Biden announced that Lebanon and Israel have agreed to the ceasefire deal, which comes into effect from 02:00 GMT this Wednesday.
Traders now look forward to the first revision of the US Q3 GDP print and the US Personal Consumption Expenditure (PCE) Price Index for some meaningful impetus.
The market attention will then shift to a slew of Japanese macro data, including Tokyo's Core CPI report, due for release during the Asian session on Friday.

USD/JPY could accelerate the fall once the 152.00 pivotal support is broken

From a technical perspective, the overnight close below the 100-period Simple Moving Average (SMA) on the 4-hour chart and the subsequent downfall favors bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction and support prospects for a further USD/JPY depreciating move. Hence, some follow-through weakness towards the very important 200-day SMA, currently pegged around the 152.00 mark, looks like a distinct possibility. A convincing break below the latter could expose the monthly swing low, around the 151.30-151.25 region.

On the flip side, the 153.00 round figure might now act as an immediate hurdle ahead of the 153.25-153.30 region. A sustained strength beyond the latter might trigger a short-covering rally and allow the USD/JPY pair to reclaim the 154.00 mark. The upward trajectory could extend further towards the 154.60 intermediate hurdle en route to the 155.00 psychological mark and the next relevant hurdle near the 155.35-155.40 area.

Economic Indicator

Core Personal Consumption Expenditures - Price Index (YoY)

The Core Personal Consumption Expenditures (PCE), released by the US Bureau of Economic Analysis on a monthly basis, measures the changes in the prices of goods and services purchased by consumers in the United States (US). The PCE Price Index is also the Federal Reserve’s (Fed) preferred gauge of inflation. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The core reading excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures." Generally, a high reading is bullish for the US Dollar (USD), while a low reading is bearish.

Why it matters to traders?

After publishing the GDP report, the US Bureau of Economic Analysis releases the Personal Consumption Expenditures (PCE) Price Index data alongside the monthly changes in Personal Spending and Personal Income. FOMC policymakers use the annual Core PCE Price Index, which excludes volatile food and energy prices, as their primary gauge of inflation. A stronger-than-expected reading could help the USD outperform its rivals as it would hint at a possible hawkish shift in the Fed’s forward guidance and vice versa.

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