Japanese yen in losses, downside appears limited as poll suggests rate hike

• The Japanese yen eases after the release of Wednesday’s trade balance data.
• The Reuters poll suggests more than half of economists expect the BoJ to raise interest rates again by the end of the year.
• The US dollar holds ground due to market caution ahead of the FOMC meeting minutes.

The Japanese yen (JPY) snaps its three-day winning streak against the US dollar (USD) after the release of trade balance data on Wednesday. However, the JPY’s decline could be limited due to the increasing likelihood of another short-term interest rate hike. Traders are also anticipating Bank of Japan (BoJ) Governor Kazuo Ueda’s appearance in parliament on Friday, where he will discuss the central bank’s decision last month to raise interest rates.

Japan’s merchandise trade balance slipped to a deficit of ¥621.84 billion in July, reversing the ¥224.0 billion surplus reported in June and missing market estimates of a ¥330.7 billion deficit. This marks the fifth deficit this year as imports grew at a much faster pace than exports.

The US dollar (USD) is trying to snap a three-day losing streak as traders turn cautious ahead of Wednesday’s FOMC meeting minutes for the July policy decision. In addition, traders await Fed Chairman Jerome Powell’s upcoming speech in Jackson Hole on Friday.

CME’s FedWatch tool suggests markets are now pricing in nearly 67.5% odds for a 25 basis point (bps) Fed rate cut at its September meeting, down from 76% a day ago. The probability of a 50 basis point rate cut fell to 32.5% from 53.0% a week earlier.

Daily Digest Market Movers: Japanese yen falls on trade balance data

• More than half of economists expect the Bank of Japan (BoJ) to raise interest rates again by the end of the year, according to a Reuters poll published on Wednesday. In the August 13-19 survey, 31 out of 54 economists predicted the BoJ would raise borrowing costs by the end of the year. The average forecast for the year-end rate is 0.50%, marking an increase of 25 basis points.
• Japan’s imports rose 16.6% year-on-year in July to a 19-month high of ¥10,241.01 billion, beating market expectations of 14.9% and up sharply from June’s 3.2% increase . This marks the strongest increase in imports since January 2023. Meanwhile, exports rose 10.3% year-on-year to a seven-month high of ¥9,619.17 billion, accelerating from growth of 5.4 % from the previous month, but being below market forecasts of 11.4%.
• Federal Reserve (Fed) Governor Michelle Bowman on Tuesday expressed caution about making any policy changes, citing rising inflation risks. Bowman warned that overreacting to individual data points could undermine progress already made, according to Reuters.
• According to Reuters, the Bank of Japan (BoJ) projected that a strong economic recovery would help inflation reach its 2% target sustainably. That would justify further interest rate hikes after last month’s hike as part of the BoJ’s continued effort to unwind years of ample monetary stimulus.
• Federal Reserve Bank of San Francisco President Mary Daly stressed on Sunday that the US central bank should take a gradual approach to reducing borrowing costs, according to the Financial Times. In addition, Federal Reserve Bank of Chicago President Austan Goolsbee warned that central bank officials should be cautious about keeping policy tight longer than necessary, according to CNBC.
• On Thursday, Kazutaka Maeda, an economist at the Meiji Yasuda Research Institute, said the reports were simply positive overall and “support the BoJ’s view and bode well for further rate hikes, although the central bank would remain cautious, since the last rate hike took place. caused the yen to rise sharply.”
• Japan’s Gross Domestic Product (GDP) rose 0.8% quarter-on-quarter in Q2, beating market forecasts of 0.5% and rebounding from a 0.6% decline in Q1. This marked the strongest quarterly growth since the first quarter of 2023. Meanwhile, annualized GDP growth reached 3.1%, beating the market consensus of 2.1% and reversing a 2.3% contraction in Q1. This was the strongest annual expansion in Q2 since 2023.
• Rabobank senior FX strategist Jane Foley notes that this week’s series of US data, along with next week’s Jackson Hole event, should give the market a clearer view of potential responses from US policy makers. However, their main expectation is for the Fed to cut rates by 25 basis points in September and likely cut them again before the end of the year.

Technical Analysis: USD/JPY rises to near 145.50

USD/JPY is trading around 145.50 on Wednesday. Analysis of the daily chart shows that the pair is consolidating below a downtrend line, suggesting a bearish trend. Additionally, the 14-day Relative Strength Index (RSI) is just above 30, suggesting a potential correction for the pair.

For support levels, the USD/JPY pair could navigate the region around the round numbers at 144.00 before 143.00 before a seven-month low of 141.69 that was made on August 5. A further decline could lead the pair to the next significant support level. at 140.25.

On the other hand, USD/JPY could face immediate resistance at the downtrend line around the nine-day exponential moving average (EMA) at 146.80. A break above this level could prompt the pair to test the resistance level at 154.50, which has moved from previous support to current resistance.

USD/JPY: Daily chart