The Japanese yen continued its comeback against the US dollar as the focus shift to next week’s Bank of Japan (BoJ) and Federal Reserve interest rate decisions. The USD/JPY price retreated to a low of 156 on Tuesday, down from this month’s high of 161.76.
Bank of Japan rate hike and interventions
The USD to JPY exchange rate has pulled back modestly in the past few days as investors focused on the BoJ interventions. Recent data show that the BoJ has spent over $22 billion in the forex market to prevent the yen’s crash. In a note at the time, an analyst at Mitsubishi UFJ wrote that:
“The timing of intervention was unexpected. They wanted to show they have many ways to intervene as this battle drags on without any clear sign of light at the end of the tunnel.”
This year’s interventions are the biggest ones that the BoJ has done since 2022 when it spent over $66 billion as the currency dropped.
The next important Japanese economic numbers will come out on Wednesday when S&P Global and au Jibun Bank will publish their flash manufacturing and services PMI numbers for this month.
The country’s statistics agency will also publish the latest Tokyo consumer inflation numbers on Friday. Economists expect the data to reveal that the city’s inflation rose slightly in July to 2.2%, higher than the BoJ’s target of 2.0%.
The Tokyo CPI number is important because it is the country’s biggest city with over 13.9 million residents.
The most important catalyst for the USD/JPY pair will happen next week when the BoJ delivers its interest rate decision. With inflation remaining above the 2% target level, analysts expect that the BoJ will deliver the second interest rate hike of the year.
Analysts at Barclays Bank expect that the BoJ will hike by 0.25% while other analysts see it slashing by a smaller 0.15%. These rate hike expectations explain why the Japanese yen has bounced back recently. In a statement, an analyst at Nomura Securities said:
“If the yen continues to trade weakly into the July meeting, the bank would need to consider an early rate hike even as it decides on the pace of Japanese government bond purchase reductions.”
US PCE data and Fed decision
The USD/JPY pair has also retreated ahead of Friday’s US Personal Consumption Expenditure (PCE) data. This is an important inflation number that the Fed pays a close attention to because it looks at the changes in prices in rural and urban centers.
It is also an important report because it is accompanied by personal spending and income numbers that the Fed pays a close attention to.
Economists believe that the latest PCE data will show that prices continued easing in June, the third straight month.
If this view is correct, it means that the Federal Reserve will be incentivised to start cutting interest rates in September.
The Fed will also meet next week and deliver its interest rate decision on Wednesday. The consensus view is that the bank will not hike rates this time. Instead, officials will maintain their recent tone in which they welcome inflation data and commit to cut interest rates later this year.
The most important data to watch will be the July non-farm payroll (NFP) numbers that will come out next week. If the data shows that the unemployment rate continued rising in July, then odds of a September cut will jump exponentially.
In a recent statement, Jerome Powell noted that he was comfortable cutting interest rates even with inflation above the 2.0% target. He noted that the bank was now more concerned about the labor market.
The next important monetary event will happen in August at the Jackson Hole Symposium, where the Fed will lay the groundwork of a September rate cut. Jackson Hole is a summit where central banks from many developed countries meet and deliberate on monetary policy.
USD/JPY technical analysis
Turning to the daily chart, we see that the USD/JPY exchange rate peaked at a multi-decade high of 161.76 last week and then retreated as the BoJ intervened. It has now dropped below the 50-day moving average and the lower side of the ascending channel. These are signs that the downtrend is gaining momentum.
The USD to JPY exchange rate has also moved below the psychological point at 155. At the same time, the bars of the histogram indicator have moved below the zero line while the RSI indicator has dropped.
Therefore, the pair could continue falling as sellers target the key support at 151.91, its highest point in November last year. More downside will be confirmed if it moves below that level.
The alternative scenario is where the USD/JPY rebounds as buyers attempt to retest the psychological point at 160.
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