Japanese Yen extends its intraday descent against USD; fills weekly gap on BoJ uncertainty

• The Japanese Yen struggles to capitalize on modest intraday gains amid the BoJ rate-hike uncertainty. 
• The risk-on mood further undermines the safe-haven JPY and lifts USD/JPY back closer to mid-154.00s.
• Retreating US bond yields prompts some USD profit-taking and could support the lower-yielding JPY.

The Japanese Yen (JPY) fills a major part of its weekly bullish gap opening against its American counterpart, with the USD/JPY pair hovering near the top end of its daily range during the early European session on Monday. Even though Bank of Japan (BoJ) Governor Kazuo Ueda left the door open for a December rate hike, traders seem convinced that increased political uncertainty in Japan could restrict the central bank from tightening its policy further. This, along with the prevalent risk-on mood, is seen undermining the safe-haven JPY and acting as a tailwind for the currency pair. 

Meanwhile, expectations that US President-elect Donald Trump's policies could reignite inflation and limit the scope for the Federal Reserve (Fed) to cut interest rates further help revive the US Dollar (USD).  This turns out to be another factor lending some support to the USD/JPY pair. That said, intervention fears and a sharp fall in the US Treasury bond yields might hold back traders from placing aggressive bearish bets around the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through buying before positioning for any further appreciation move for the pair. 

Japanese Yen traders seem more clarity on BoJ rate-hike plans before placing directional bets

• US President-elect Donald Trump nominated prominent investor Scott Bessent – a fiscal conservative – as Treasury Secretary, reassuring the bond market and pulling yields lower across the board. 
• The US Dollar, having risen for eight weeks in a row, retreats from its highest level since November 2022 as traders opt to take some profits off the table following the post-US election blowout rally.
• Despite stronger consumer inflation data from Japan and Bank of Japan Governor Kazuo Ueda's hawkish remarks, domestic political uncertainty could restrict the BoJ from tightening its monetary policy. 
• Meanwhile, investors have been scaling back their bets for another 25-basis-points rate cut by the Federal Reserve in December amid worries that Trump's policies could boost inflationary pressures. 
• According to CME Group's FedWatch Tool, traders are pricing in just over a 55% probability that the Fed will lower borrowing costs next month and a nearly 45% chance for an on-hold decision. 
• The optimism over more business-friendly policies from the new Trump administration was reinforced by the flash US PMIs, showing that business activity climbed to a 31-month high in November.
• S&P Global reported on Friday that the Composite US PMI rose to 55.3 this month, or the highest level since April 2022, suggesting that economic growth probably accelerated in the fourth quarter. 
• Reports suggest that a ceasefire deal between Israel and the Lebanese militant group Hezbollah is very close, which further fuels the risk-on mood and might cap the upside for the safe-haven JPY. 
• The focus this week will be squarely on the US Personal Consumption and Expenditure (PCE) Price Index data, which could offer cues on the Fed's interest rate path and provide a fresh impetus. 

USD/JPY finds support ahead of last week's swing low, 155.00 mark holds the key for bulls

From a technical perspective, acceptance below the 100-period Simple Moving Average (SMA) now seems to have set the stage for a further depreciating move for the USD/JPY pair. That said, any further slide might continue to find some support near the 153.30-153.25 region. This is followed by the 153.00 round figure, which if broken decisively will be seen as a fresh trigger for bearish traders and pave the way for deeper losses. Spot prices might then accelerate the fall towards the next relevant support near mid-152.00s en route to the very important 200-day SMA, currently pegged near the 152.00 mark.

On the flip side, the 154.00 round figure now seems to act as an immediate hurdle ahead of the Asian session top, around the 154.40 region. Some follow-through buying should allow the USD/JPY pair to reclaim the 155.00 psychological mark and climb further towards the 155.40-155.50 supply zone. A sustained strength beyond the latter should pave the way for a move beyond the 156.00 mark, towards retesting the multi-month top, around the 156.75 region touched on November 15.

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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