The Japanese yen is depreciating, possibly due to weak trading on Japan Mountain Day

• The Japanese yen falls on weak trading as traders observe the Mountain Day holiday in Japan.
• The US dollar is getting support on the slim chance of a Fed rate cut following upbeat US data last week.
• Refuge flows may limit JPY downside amid heightened geopolitical tensions.

The Japanese yen (JPY) is retracing recent gains against the US dollar (USD), with trading volumes likely to be subdued due to the Japanese market closing for the Mountain Day. Support for the USD/JPY pair comes from stronger-than-expected US economic data released last week, which led traders to lower their expectations of an interest rate cut by the US Federal Reserve.

On Sunday, Federal Reserve Governor Michelle Bowman said she continues to see upside risks to inflation and continued strength in the labor market. Bowman suggested the Federal Reserve may not be ready to cut rates at its next meeting in September, according to Bloomberg.

The CME FedWatch tool indicates a 46.5% chance of a 50 basis point rate cut by the Fed at its September meeting, down significantly from the 74.0% chance reported a week ago.

Last week, Japan’s monetary policy outlook showed that Bank of Japan (BoJ) officials expressed their willingness to raise interest rates further, although they became more cautious due to increased market volatility. Meanwhile, Japan’s Finance Minister Shunichi Suzuki stressed that monetary policy decisions are the responsibility of the Bank of Japan, while they continue to closely monitor market developments, as reported by Reuters.

Daily Digest Market Movers: Japanese yen falls on low chance of Fed rate cuts

• The Japanese yen could receive support from safe-haven flows amid heightened geopolitical tensions in the Middle East. ABC News reported that the Israel Defense Forces (IDF) intercepted around 30 “projectiles” passing from Lebanon into northern Israel on Monday morning. The IDF said some projectiles landed in open areas and no injuries were reported.
• A Julius Baer analyst believes there is no need for the Bank of Japan to raise interest rates significantly above current levels. Once market conditions settle, the interest rate differential of around 500 basis points between the JPY and the USD is expected to become the main driver. The analyst does not foresee further appreciation of the yen.
• Bloomberg reported that JP Morgan Asset Management (JPAM) believes the Bank of Japan is unlikely to raise interest rates in the near term. According to JPAM, the BoJ could consider further rate hikes only if the Federal Reserve cuts interest rates and the US economy stabilises. They anticipate that any further tightening by the BoJ is more likely to occur in 2025, provided the global economic environment remains stable.
• On Thursday, Kansas City Fed President Jeffrey Schmid said easing monetary policy may be “appropriate” if inflation remains low. Schmid noted that the Fed’s current policy is “not that restrictive” and that while the Fed is close to its 2 percent inflation target, it has not yet fully achieved it, according to Reuters.
• Initial US jobless claims fell to 233,000 in the week ended August 2, below market expectations of 240,000. This decline follows an upwardly revised figure of 250,000 for the previous week, which was the largest in a year.
• The Bank of Japan’s summary of views from its July 30-31 monetary policy meeting showed that several members believe economic activity and prices are progressing as the BoJ anticipated. Members aim for a neutral rate of “at least around 1%” as a medium-term objective.
• On Wednesday, BoJ Deputy Governor Shinichi Uchida also noted that the BoJ’s interest rate strategy will adjust if market volatility changes economic forecasts, risk assessments or forecasts. Given recent market volatility, he stressed the need to closely monitor the economic and price impact of their policies, saying, “We need to maintain the current degree of monetary easing for now.”
• The minutes of the Bank of Japan’s June meeting showed that some members expressed concern about rising import prices due to the recent decline in the JPY, which could pose a risk of rising inflation. One member noted that cost-push inflation could intensify underlying inflation if it results in higher inflationary expectations and wage increases.

Technical Analysis: USD/JPY rises to near 147.00

USD/JPY is trading around 147.00 for the month. Daily chart analysis shows that the pair is positioned above the descending channel, suggesting a weakening of a bearish bias. Moreover, the 14-day Relative Strength Index (RSI) is at the 30 level. If the RSI moves towards 50, it could signal a potential improvement in the pair’s momentum.

For support levels, the USD/JPY pair may test the upper limit around the 145.50 level. If it breaks below this level, the pair could face downward pressure, potentially pushing it towards the rebound support at 140.25 and further down to the lower limit of the descending channel near 137.00.

On the other hand, the USD/JPY pair could test the immediate barrier at the nine-day exponential moving average (EMA) around the 147.75 level. A break above this level could dampen the bearish momentum and allow the pair to approach “resistance turned support” at 154.50.

USD/JPY: Daily chart