Japanese Yen seems vulnerable; USD/JPY bulls await FOMC minutes before placing fresh bets

• The Japanese Yen struggles to lure buyers amid uncertainty over future BoJ rate hikes.
• Hopes for a possible Hezbollah-Israel ceasefire further undermine the safe-haven JPY.
• Intervention fears cap USD/JPY amid subdued USD demand ahead of FOMC minutes.

The Japanese Yen (JPY) remains depressed against its American counterpart during the Asian session, with the USD/JPY pair eyeing this week's swing high ahead of the release of the FOMC meeting minutes later this Wednesday. In the meantime, diminishing odds for more rate hikes by the Bank of Japan (BoJ) in 2024, especially after data released on Tuesday showed that Japan's real wages fell in August after two months of gains, keeps the JPY bulls on the defensive. 

Furthermore, news of a possible Hezbollah-Israel ceasefire undermined demand for the safe-haven JPY and acts as a tailwind for the USD/JPY pair. That said, speculations that Japanese authorities might intervene to support the domestic currency might help limit losses for the JPY amid subdued US Dollar (USD) price action. Traders might also prefer to wait for this week's release of the US Consumer Price Index (CPI) and the Producer Price Index (PPI) before placing directional bets. 

Daily Digest Market Movers: Japanese Yen bears have the upper hand amid fading BoJ rate hike bets

• According to the government data released on Tuesday, real wages in Japan – the world's fourth-largest economy – fell 0.6% and household spending declined by 1.9%  in August from the same month a year earlier.
• This, along with comments from Japan's Prime Minister Shigeru Ishiba, saying that the country is not in an environment for more rate increases, could derail the Bank of Japan's rate-hike plans in the coming months.
• Israeli forces made new incursions in the south of Lebanon on Tuesday, raising the risk of a full-blown war in the Middle East, though the fears eased after Iran-backed Hezbollah left the door open for a negotiated ceasefire.
• Japan's Finance Minister Katsunobu Kato said earlier this week that the government would monitor how rapid currency moves could potentially impact the economy and would take action if necessary. 
• The Reuters Tankan monthly poll showed on Wednesday that Japanese manufacturers turned more confident about business conditions in October and the sentiment index rose from 4 in September to 7 this month. 
• The survey, however, indicated that Japanese manufacturers remained wary about the pace of China's economic recovery and the service sector's mood eased, reflecting patchy economic conditions in Japan.
• The US Dollar extends its consolidative price move near a seven-week top amid diminishing odds for a more aggressive policy easing by the Federal Reserve and does little to influence the USD/JPY pair.
• Traders now look forward to the release of September FOMC meeting minutes for some impetus, ahead of the US Consumer Price Index and the Producer Price Index on Thursday and Friday, respectively. 

Technical Outlook: USD/JPY seems poised to reclaim 149.00 and extend short-term ascending trend

From a technical perspective, the emergence of some dip-buying on Tuesday comes on the back of last week's move beyond the 50-day Simple Moving Average (SMA) for the first time since mid-July and favors bullish traders. Moreover, spot prices now seem to have found acceptance above the 148.00 mark, or the 38.2% Fibonacci retracement level of the July-September downfall. This, along with the fact that oscillators on the daily chart have been gaining positive traction, suggests that the path of least resistance for the USD/JPY pair is to the upside. Any further move up, however, might confront some resistance near the 148.70 zone ahead of the 149.00 round figure. Some follow-through buying beyond the weekly top, around the 149.10-149.15 region, will reaffirm the positive outlook and allow the pair to reclaim the 150.00 psychological mark.

On the flip side, the overnight swing low, around the 147.35-147.30 region, now seems to protect the immediate downside ahead of the 147.00 mark. A convincing break below the latter could drag the USD/JPY pair to the 146.45 intermediate support en route to the 146.00-145.90 region and the 145.00 confluence support. The latter comprises the 50-day SMA and the 23.6% Fibo. level, which if broken decisively will suggest that the recent recovery from the vicinity of mid-139.00s, or a 14-month low has run its course and shift the near-term bias in favor of bearish traders.

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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