Japanese yen appreciates on BoJ interest rate decision, inflation data

• The Japanese yen is holding steady as the BoJ keeps its interest rate at 0.15% at Friday’s meeting.
• Japan’s consumer price index rose 3.0% year-on-year in August, hitting the highest level since October 2023.
• The US Dollar faces challenges due to the increasing chances of further Fed rate cuts in 2024.

The Japanese Yen (JPY) is holding steady against the US Dollar (USD) following the Bank of Japan’s (BoJ) policy decision on Friday, keeping interest rates at 0.15% as expected. In addition, Japan’s consumer price index (CPI) rose to 3.0% year-on-year in August, up from 2.8% previously, marking the highest level since October 2023. In addition, the national core CPI , excluding fresh food, hit a six-month high of 2.8%, up for the fourth consecutive month and in line with market expectations.

USD/JPY’s downside is underpinned by a weaker US dollar (USD) as expectations grow for further interest rate cuts by the US Federal Reserve (Fed) by the end of 2024. Latest Point Projections points to a gradual easing cycle, with the median rate for 2024 revised to 4.375%, down from June’s forecast of 5.125%.

However, Federal Reserve Chairman Jerome Powell said at the post-meeting press conference that the Fed was in no rush to ease policy and stressed that half-percentage-point cuts were not the “new pace.”

Daily Digest Market Movers: Japanese yen gets support from BoJ’s Soviet policy

• Japan’s Finance Minister Shunichi Suzuki said on Friday that he would “continue to monitor and analyze the impact of the latest US interest rate cut on the Japanese economy and financial markets.” Suzuki added that the Federal Reserve Bank’s (FRB) outlook on the US economy is in line with the Japanese government’s view that the US economy is likely to expand.
• US Treasury Secretary Janet Yellen said on Friday that the recent interest rate cut by the Federal Reserve is a very positive indicator for the US economy. According to Yellen, this demonstrates the Fed’s confidence that inflation has fallen significantly and is moving toward the 2% target. Meanwhile, the labor market continues to be strong.
• The Federal Open Market Committee (FOMC) cut the federal funds rate to a range of 4.75% to 5.0%, marking the Fed’s first rate cut in four years. Fed policymakers updated their quarterly economic forecasts, raising the median projection for unemployment to 4.4 percent by the end of 2024, up from the 4.0 percent estimate made in June. They also raised their long-term forecast for the federal funds rate from 2.8 percent to 2.9 percent.
• Federal Reserve Chairman Jerome Powell commented on the aggressive 50 basis point interest rate cut, saying, “This decision reflects our increased confidence that with the right adjustments to our policy approach, we can maintain a market of strength of strong labour, we achieve moderate economic growth and bring inflation down to a sustainable level of 2%.”
• Japan’s merchandise trade balance posted a larger trade deficit of ¥695.30 billion in August, up from ¥628.70 billion the previous month, but well below market expectations of a ¥1,380.0 billion deficit . Exports rose 5.6 percent year-on-year, marking the ninth straight month of growth, but fell short of the anticipated 10.0 percent. Imports rose just 2.3 percent, the slowest pace in five months, significantly beating the expected 13.4 percent increase.
• Japanese Finance Minister Shunichi Suzuki said on Tuesday that rapid fluctuations in the exchange rate were undesirable. Suzuki stressed that officials will closely monitor how currency movements affect the Japanese economy and people’s livelihoods. The government will continue to assess the impact of a stronger Japanese yen and respond accordingly, according to Reuters.
• Commerzbank FX analyst Volkmar Baur predicted the Bank of Japan would remain on the sidelines this week. Baur noted that the Federal Reserve’s actions could have a bigger impact on the USD/JPY pair, suggesting that the JPY could have a strong chance of falling below 140.00 per USD even without a rate hike from the BoJ.

Technical analysis: USD/JPY drops to 142.00; further downside guided by 21-day EMA

USD/JPY is trading around 142.30 on Friday. Analysis of the daily chart indicates that the pair is consolidating in a descending channel, which supports a bearish trend. However, the 14-day Relative Strength Index (RSI) remains below the 50 level, confirming an ongoing bearish outlook.

On the downside, USD/JPY could find immediate support at 139.58, which is the June 2023 low, followed by the lower limit of the descending channel near 137.50.

On the resistance side, the 21-day Exponential Moving Average (EMA) at 143.56 acts as an initial barrier, followed by the upper limit of the descending channel around the 144.80 level.

USD/JPY: Daily chart