Japanese yen extends losses despite hawkish sentiment around BoJ

• The Japanese Yen is in decline despite a mixed mood surrounding the BoJ’s policy outlook.
• JPY’s downside could be limited as traders expect the BoJ to raise interest rates further.
• US Fed Chairman Powell has signaled an interest rate cut soon, putting downward pressure on the US dollar.

The Japanese yen (JPY) continued to lose ground against the US dollar (USD) for the second day in a row on Tuesday. However, the JPY’s downside could be narrowed due to the mood surrounding the Bank of Japan (BoJ).

Additionally, contrasting statements from the BoJ and the Federal Reserve (Fed) on their policy outlooks are putting downward pressure on the USD/JPY pair. BoJ Governor Kazuo Ueda told Parliament on Friday that the central bank could raise interest rates further if its economic forecasts are correct.

Meanwhile, Fed Chairman Jerome Powell told the Jackson Hole Symposium: “The time has come for policy to adjust.” However, Powell did not specify when the rate cuts would begin or their potential size. In addition, San Francisco Federal Reserve President Mary Daly said in an interview with Bloomberg TV on Monday that “the time has come” to start cutting interest rates, possibly starting with a quarter-percentage point cut.

Daily Digest Market Movers: Japanese yen slips lower despite dovish BoJ

• According to the CME FedWatch tool, markets fully anticipate a rate cut of at least 25 basis points (bps) by the Federal Reserve at its September meeting.
• Japan’s Finance Minister Shunichi Suzuki said on Tuesday that foreign exchange rates are influenced by a variety of factors, including monetary policies, interest rate differentials, geopolitical risks and market sentiment. Suzuki added that it is difficult to predict how these factors will affect exchange rates.
• US durable goods orders rose 9.9% month over month in July, rebounding from a 6.9% decline in June. This increase significantly exceeded the expected increase of 4.0%, marking the biggest gain since May 2020.
• Bloomberg reported on Friday that Philadelphia Fed President Patrick Harker stressed the need for the US central bank to gradually lower interest rates. Meanwhile, Reuters reported that Chicago Fed President Austan Goolsbee noted that monetary policy is currently at its most restrictive, with the Fed now focusing on meeting its hiring mandate.
• Bank of Japan (BoJ) Governor Kazuo Ueda addressed the Japanese parliament on Friday, saying he “does not consider selling long-term Japanese government bonds (JGBs) as a tool to adjust interest rates.” He noted that any reduction in JGB purchases would only represent about 7-8% of the balance sheet, which is a relatively small drop. Ueda added that if the economy lines up with their projections, there could be a phase where they could adjust interest rates a bit more.
• Japan’s national consumer price index rose 2.8 percent year-on-year in July, maintaining that rate for the third straight month and remaining at its highest level since February. In addition, the national CPI excluding fresh food rose 2.7%, the most since February, in line with expectations.
• The US composite PMI fell to 54.1 in August, a four-month low, from 54.3 in July, but remained above market expectations of 53.5. This indicates continued expansion in US business activity, marking 19 consecutive months of growth.
• The minutes of the FOMC’s July policy meeting indicated that most Fed officials agreed last month that they were likely to cut their benchmark interest rate at the next meeting in September as long as inflation continued to cool.

Technical analysis: USD/JPY is testing a psychological level at 145.00

USD/JPY is trading around 144.90 on Tuesday. Analysis of the daily chart shows that the pair is testing the downtrend line, suggesting a bearish trend. However, the 14-day Relative Strength Index (RSI) remains slightly above 30, suggesting confirmation of a bearish trend.

On the downside, if USD/JPY holds below the downtrend line, it could oscillate around the seven-month low of 141.69 hit on August 5. A break below this level could push the pair towards the rebound support at 140.25.

In terms of resistance, the USD/JPY pair may challenge the immediate barrier at the nine-day exponential moving average (EMA) around the 145.67 level. A break above this level could pave the way for the pair to explore the area near the reversal resistance at 154.50.

USD/JPY: Daily chart