The Japanese yen breaks the recent rally due to dovish comments from future Prime Minister Ishiba

• The Japanese yen weakened as incoming Prime Minister Shigeru Ishiba said monetary policy should remain accommodative.
• Japan’s retail trade rose 2.8 percent from a year ago in August, beating expectations for a 2.3 percent increase.
• August’s US Core PCE Price Index reinforced the possibility of an aggressive Fed rate cut cycle.

The Japanese yen (JPY) edged lower against the US dollar (USD) on Monday after dovish comments from Japan’s incoming prime minister, former defense chief Shigeru Ishiba. Ishiba said on Sunday that the country’s monetary policy should continue to be accommodative, pointing to the need to keep borrowing costs low to support a fragile economic recovery, according to The Japan Times.

Japan’s retail trade rose 2.8 percent from a year ago in August, beating market expectations of 2.3 percent and slightly beating the upwardly revised 2.7 percent increase from the previous month. On a month-over-month basis, seasonally adjusted retail trade rose 0.8 percent, marking the biggest increase in three months, after a 0.2 percent rise in July.

The US dollar received downward pressure following Friday’s US personal consumer expenditure (PCE) price index data for August, which aligns with the US Federal Reserve’s (Fed) inflation outlook. This strengthened the possibility of an aggressive rate-cutting cycle by the central bank.

The CME FedWatch tool indicates that markets assign a 42.9% probability of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point rate cut rose to 57.1 %, compared to 50.4% a week ago.

Daily Digest Market Movers: Japanese yen under pressure on doubts about BoJ policy outlook

• Japan’s Chief Cabinet Secretary Yoshimasa Hayashi refrained from commenting on Monday’s daily stock market swings. Hayashi stressed the importance of closely monitoring the economic and financial situation both domestically and internationally with a sense of urgency. He also noted the need for continued collaboration with the Bank of Japan.
• The President of the Federal Reserve in St. Louis Alberto Musalem said on Friday, according to the Financial Times, that the Fed should start cutting interest rates “gradually” after a half-point cut larger than usual at its September meeting. Musalem acknowledged the possibility that the economy could weaken more than anticipated, saying, “If that were the case, then a faster pace of rate cuts might be appropriate.”
• The US Personal Consumer Expenditure (PCE) price index for August rose 0.1% month-on-month, below market expectations for a 0.2% increase and less than the previous increase of 0 .2%. Meanwhile, Core PCE on a year-over-year basis rose 2.7%, in line with expectations and slightly above the previous reading of 2.6%.
• Tokyo’s consumer price index (CPI) rose 2.2 percent year-on-year in September, down from a 2.6 percent increase in August. Meanwhile, the CPI excluding fresh food and energy rose 1.6 percent from a year earlier in September, unchanged from the previous reading. CPI excluding fresh food rose 2.0% in line with expectations, compared with a previous increase of 2.4%.
• Annualized US Gross Domestic Product rose at a 3.0% rate in the second quarter, as previously estimated, according to the US Bureau of Economic Analysis (BEA). Meanwhile, the GDP Price Index rose 2.5% in the second quarter.
• On Thursday, the minutes of the BoJ’s monetary policy meeting expressed consensus among members on the importance of remaining vigilant on the risks of inflation overshooting targets. Several members indicated that raising rates to 0.25% would be appropriate as a way of adjusting the level of monetary support. A few others suggested that a moderate adjustment of monetary support would also be appropriate.
• Last week, BoJ Governor Kazuo Ueda indicated that the central bank has time to assess market and economic conditions before making any policy adjustments, signaling there is no urgency to raise interest rates again. Ueda also noted that Japan’s real interest rate remains deeply negative, which is helping to stimulate the economy and boost prices.

Technical Analysis: USD/JPY remains above 142.00 after breaking below the ascending channel

USD/JPY is trading around 142.20 for the month. Analysis of the daily chart indicates that the pair has broken below the ascending channel pattern, signaling a change in momentum from a bearish to bearish trend. Additionally, the 14-day Relative Strength Index (RSI) is below the 50 level, indicating bearish sentiment in play.

In terms of support, USD/JPY may hover around the 139.58 region, the June 2023 low.

On the other hand, a return to the ascending channel could weaken the bearish case and lead USD/JPY to test the nine-day exponential moving average (EMA) at 143.10. A break above this level could help the pair test the upper limit of the ascending channel at 146.20, followed by its five-week high of 147.21, which was recorded on September 3.

USD/JPY: Daily chart