Japanese yen loses ground, downside appears limited due to Soviet BoJ

• The Japanese yen depreciates, despite a sense of variety around the BoJ’s policy outlook.
• JPY’s downside could be narrowed as traders expect the BoJ to raise interest rates further.
• The US dollar received downward pressure as Fed Chairman Powell signaled a rate cut soon.

The Japanese yen (JPY) was slightly lower against the US dollar (USD) on Wednesday. However, conflicting outlooks from the Bank of Japan (BoJ) and the Federal Reserve (Fed) are putting downward pressure on the USD/JPY pair. BoJ Governor Kazuo Ueda indicated in Parliament on Friday that the central bank could consider further interest rate hikes if its economic forecasts prove accurate.

The downside for the JPY may be limited by dovish sentiment around the Bank of Japan (BoJ). Meanwhile, Fed Chairman Jerome Powell remarked at the Jackson Hole Symposium that “the time has come for policy to adjust.” However, Powell did not specify the timing or extent of potential rate cuts.

In addition, San Francisco Federal Reserve President Mary Daly said in a Bloomberg TV interview on Monday that “the time has come” to start cutting interest rates, possibly starting with a quarter-percentage point cut.

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.

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

• 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 remains above 144.00

USD/JPY is trading around 144.20 on Wednesday. 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 145.23 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