USD/JPY Movements: Policy Shifts and What to Watch for
The USD/JPY pair has seen a whipsaw move amid economic and policy changes in Japan and the US in the past month. The pair hit a new low but recovered, ending the month nearly flat.
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Recent USD/JPY Movements Overview
In the past 30 days, the USD/JPY has experienced volatile moves on both sides. Although many factors caused these moves, major ones included the FOMC and BoJ policy meetings.
Factors Driving the Fluctuations in September
The recent drop in USD/JPY came as market participants bet on the first Fed rate cut. Data in the weeks before the meeting had revealed economic weakness, strengthening the case for a rate cut.
Bets fluctuated between a 25 and a 50-bps cut. However, before the meeting, expectations for a 50-bps cut soared, weakening the dollar and pushing USD/JPY lower.
At the same time, several top BoJ officials left hawkish remarks before the central bank’s meeting, supporting the outlook for more rate hikes. As a result, the yen strengthened against the dollar, putting pressure on the USD/JPY pair.
The recent rise in USD/JPY came soon after the Fed policy meeting. For many weeks before the meeting, investors had speculated on the size of the first cut. Moreover, there was optimism regarding the first rate cut in over four years.
Therefore, although the Fed surprised markets with a massive rate cut, most of this move was already priced in. The yen strengthened before the meeting but reversed soon as investors locked in their profits. They bought the rumor and sold the fact.
Another reason for the recent rise in USD/JPY was the Bank of Japan policy meeting. Before the meeting, yen bulls were optimistic as policymakers called for more rate hikes. As a result, expectations were high for more hawkishness during the meeting.
However, Governor Ueda said very little regarding rate hikes. Instead, he focused more on the state of the economy. The cautious stance weakened the yen, allowing USD/JPY to rise.
Latest policy and economic changes in the US and Japan
The US — Impact of Fed Policies and US Economic Data
On the economic front, the first significant report was on Gross Domestic Product. The US economy expanded by 3.0% in the second quarter, beating estimates for a 2.8% growth. The report showed a resilient economy, boosting the dollar and pushing USD/JPY higher. The following report was the nonfarm payrolls report, which showed slower job growth in August. The economy added 142,000 jobs compared to forecasts of 165,000.
Meanwhile, the unemployment rate held steady at 4.2%. The report solidified bets for a September rate cut, pushing USD/JPY lower. Next came the consumer inflation report, which revealed an unexpected increase in the core figure. As expected, the CPI increased by 0.2%, while the core CPI increased by 0.3%. USD/JPY rose after the report as it lowered the likelihood of a massive Fed rate cut.
Meanwhile, on the policy front, the US central bank cut borrowing costs by an unexpected 50 bps and signaled more to come. The yen fell after the meeting as investors took profits, boosting USD/JPY.
Japan — Economic Indicators and BoJ Policy
In Japan, economic reports included the Tokyo core CPI, which increased by 2.4%, higher than the estimated 2.2%. High inflation supported the outlook for more BoJ rate hikes, boosting the yen and lowering the USD/JPY.
The next key numbers showed that Japan’s economy expanded by 0.7%, missing forecasts for 0.8% growth. Nevertheless, it significantly improved from the last reading of -0.6%. Furthermore, Japan’s national CPI rose by 2.8%, meeting forecasts.
On the policy front, the Bank of Japan kept interest rates unchanged and gave little information on future rate hikes. Market participants had expected more hawkish remarks from Ueda. However, he mainly talked about the economy and rising consumption and said there was still time to assess the necessity of increases in borrowing costs. As a result, the yen sunk, allowing USD/JPY to climb.
Market Speculation on Next Moves
Investors will keep speculating on the Fed’s next move in the coming months. At the same time, they will look for clues about when the Bank of Japan might hike interest rates. Most of the market is currently pricing in that the Fed will cut rates again before the year ends, and the only uncertainty is the size. Therefore, market participants will keenly watch economic data for more clues on how big the next cut will be. According to the CME FedWatch tool, there is a 49% chance the Fed will cut by 25-bps in November.
Meanwhile, analysts expect one more rate hike from the Bank of Japan this year. Investors will pay attention to incoming data and policymaker remarks for clues on when the next hike might come. Overall, the outlook for USD/JPY points south. Rate cuts in the US will put downward pressure on the dollar. On the other hand, rate hikes in Japan will boost the yen.
Therefore, the divergence in policy between the BoJ and the Fed will continue shrinking the rate gap between the two countries. This will revive the yen, which has suffered due to the popular carry trade.
USD/JPY Technical Outlook
On the charts, USD/JPY lies within an established downtrend. The price recently made a new low near the 141.01 key level. However, since it broke below 149.57, the downtrend weakened, with the price sticking close to the 22-SMA. Although it made a lower low, the RSI made a higher low, indicating a bullish divergence.
With 141.01 support, bulls emerged to push the price towards 22-SMA. If the SMA gives way, the price will continue climbing to the 149.57 resistance, signaling a bullish reversal. On the other hand, if the SMA holds firm, USD/JPY might break below 141.01 to make a new low.
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