On Thursday during the first half of the European trading session, the Japanese Yen (JPY) initially showed a strong upward trend against the US Dollar (USD), hitting a fresh weekly high. However, it later surrendered a significant portion of its intraday gains. Despite this pullback, the overall bullish sentiment for the Yen remained intact. This rally was fueled by multiple factors, with expectations of a Bank of Japan (BoJ) rate hike being a key driver. The anticipation that strong wage growth could boost consumer spending, leading to increased inflation, gave credence to the idea that the BoJ might further tighten its monetary policy this year. As the rate differential between Japan and other countries narrowed, it provided a solid foundation for the lower – yielding Yen to strengthen.
Safe – Haven Demand Bolstering the Yen
The ongoing uncertainty surrounding US President Donald Trump’s trade policies and the escalating geopolitical tensions around the world continued to play into the Yen’s favor. In times of economic and political turmoil, the Yen is often sought after as a safe – haven asset. For instance, the complex situation in the Russia – Ukraine conflict, where Ukrainian President Volodymyr Zelenskiy and Trump agreed to work towards ending the war while Russian President Vladimir Putin rejected a proposed ceasefire, added to the global sense of instability. Additionally, the Israeli military’s incursion into Gaza, which shattered the two – month – old ceasefire with Hamas and led Israeli Prime Minister Benjamin Netanyahu to warn of a fierce war expansion, heightened geopolitical risks. These events all contributed to the flight to safety, with investors flocking to assets like the Yen.
Divergent Central Bank Expectations Impacting USD/JPY
The expectations regarding the monetary policies of the BoJ and the Federal Reserve (Fed) were also at play. On Wednesday, the BoJ concluded a two – day review meeting by keeping its key policy rate steady. During the post – meeting press conference, BoJ Governor Kazuo Ueda emphasized the importance of achieving the 2% inflation target for long – term credibility and the need to act before it’s too late. Meanwhile, the Fed, as widely expected, held interest rates steady for the second consecutive meeting. However, it signaled the likelihood of two 25 – basis – point rate cuts by the end of 2025. Policymakers also trimmed the growth forecast for the year due to the growing uncertainty over the impact of Trump’s aggressive trade policies on economic activity. Despite raising its inflation projection, traders still saw over a 65% chance that the Fed would resume its rate – cutting cycle at the June policy meeting. This divergence in expectations between the BoJ and the Fed exerted downward pressure on the USD/JPY pair.
Technical Outlook for USD/JPY
Downside Potential
From a technical analysis perspective, the USD/JPY pair faced significant resistance. Overnight, it failed to maintain a level above the crucial 150.00 psychological mark and subsequently declined. This indicated that the recent bounce from a multi – month low might have lost its momentum. The negative oscillators on the daily chart further supported the idea of a potential further depreciation for the pair. As such, a continuation of the downward movement below the 148.00 mark seemed quite possible. The next relevant support levels were near the 147.75 horizontal support, and the downward trajectory could potentially extend further to the 147.30 region, on its way to the 147.00 round figure and the 146.55 – 146.50 area, which was the lowest level since early October, touched earlier this month.
Upside Hurdles
On the flip side, if the pair attempted to recover, it would face immediate obstacles. The Asian session high, just ahead of the 149.00 mark, presented an initial hurdle. Above this, the 149.25 – 149.30 supply zone would be a significant barrier. Only if the pair managed to break above this zone could it aim to reclaim the 150.00 mark. A follow – through buying beyond the overnight swing high, around the 150.15 region, could trigger a short – covering rally, potentially lifting spot prices to the 150.60 intermediate barrier, en route to the 151.00 mark and the monthly peak around the 151.30 region.
Insights into Central Bank Policies
Federal Reserve’s Mandate and Impact on the Dollar
The Federal Reserve plays a crucial role in shaping the US monetary policy. It has a dual mandate: ensuring price stability and promoting full employment. The primary tool at its disposal to achieve these goals is adjusting interest rates. When inflation rises above the Fed’s 2% target, it hikes interest rates. This increases borrowing costs across the economy, making the US a more appealing destination for international investors. As a result, the US Dollar strengthens. Conversely, when inflation drops below 2% or the unemployment rate is high, the Fed may lower interest rates to encourage borrowing, which weakens the Dollar.
Fed’s Monetary Policy Meetings
The Federal Reserve holds eight policy meetings annually. At these meetings, the Federal Open Market Committee (FOMC) assesses economic conditions and formulates monetary policy decisions. The FOMC is composed of twelve Fed officials, including 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.
Quantitative Easing and Its Effect on the Dollar
In extreme economic situations, such as during the 2008 Great Financial Crisis, the Federal Reserve may implement Quantitative Easing (QE). QE is a non – standard policy measure used when the financial system is stuck, often due to a lack of credit flow. It involves the Fed printing more dollars and using them to purchase high – grade bonds from financial institutions. This policy typically weakens the US Dollar.
Quantitative Tightening and Its Impact on the Dollar
Quantitative Tightening (QT) is the opposite of QE. Under QT, the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from maturing bonds to purchase new bonds. This process generally has a positive impact on the value of the US Dollar.
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