The Japanese yen is lower and downside looks limited due to BoJ calls

• The Japanese yen’s downside could be limited as the BoJ is expected to implement further rate hikes.
• Recent economic growth in Japan raises the possibility of another BoJ rate hike in the near term.
• The US dollar has struggled following Fedspeak silence.

The Japanese yen (JPY) is lower against the US dollar (USD) on Tuesday. However, JPY’s downside could be narrowed amid the growing possibility of another near-term interest rate hike. Japan’s economy grew at an annualized rate of 3.1 percent in the second quarter, significantly beating expectations and rebounding from a slowdown at the start of the year.

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. On Friday, BoJ Governor Kazuo Ueda is due to discuss the central bank’s decision last month to raise interest rates.

The US Dollar (USD) is retracing recent losses on risk-averse sentiment. However, the greenback faced challenges after remarks by Federal Reserve (Fed) officials raised the prospect of further interest rate cuts. On Monday, Minneapolis Fed President Neel Kashkari suggested it would be appropriate to consider potential US interest rate cuts in September, citing concerns about a weakening labor market, according to Reuters.

Daily Digest Market Movers: Japanese yen depreciates despite a solicitous BoJ

• 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 Economy Minister Yoshitaka Shindo said the economy is expected to recover gradually as wages and incomes improve. Shindo also added that the government will work closely with the Bank of Japan to implement flexible macroeconomic policies.
• Japan’s Gross Domestic Product (GDP) rose 0.8% quarterly 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.
• The US consumer price index (CPI) rose 2.9% year-on-year in July, down slightly from June’s 3% rise and below market expectations. Core CPI, which excludes food and energy, rose 3.2 percent year-on-year, down slightly from June’s 3.3 percent rise but in line with market forecasts.
• 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 policymakers. 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 is hovering around 146.50

USD/JPY is trading around 146.60 on Tuesday. Analysis of the daily chart shows that the pair is just below the nine-day exponential moving average (EMA), indicating a short-term 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 test the seven-month low of 141.69, which was reached 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 around the nine-day exponential moving average (EMA) at 147.41. If the pair breaks this level, it could target the 50-day EMA at 152.54 and test the resistance level at 154.50, which has moved from the previous support to the current resistance.

USD/JPY: Daily chart