The Japanese Yen (JPY) gains some positive traction following verbal intervention from officials on Thursday and recovers a part of its heavy weekly losses registered over the past three days. This, along with a modest US Dollar (USD) pullback from a three-month top drags the USD/JPY pair away from its highest level since July 31, around the 153.20 area touched on Wednesday. Any further JPY appreciation, however, seems elusive amid doubts over the Bank of Japan's (BoJ) ability to hike interest rates further this year on the back of election-related uncertainty in Japan.
Furthermore, firming expectations for a less aggressive policy easing by the Federal Reserve (Fed), along with deficit-spending concerns after the US election, should keep the US bond yields elevated and limit the downside for the USD. This might further contribute to capping the upside for the lower-yielding JPY. Hence, it will be prudent to wait for strong follow-through buying before confirming that the JPY has bottomed out in the near term and positioning for a counter-trend USD/JPY move. Traders now look to the flash global PMI prints to grab short-term opportunities.
From a technical perspective, Tuesday's breakout above the 150.65 confluence hurdle and the 200-day Simple Moving Average (SMA) was seen as a fresh trigger for bullish traders. The subsequent move up, however, stalls near the 61.8% Fibonacci retracement level of the July-September downfall amid a slightly overbought Relative Strength Index (RSI) on the daily chart. The said barrier is pegged near the 153.20 area and should now act as a key pivotal point, which if cleared decisively should pave the way for an extension of over a one-month-old uptrend. The USD/JPY pair might then aim to reclaim the 154.00 mark and climb further towards the 154.30 supply zone. The momentum could extend further towards the 154.75 horizontal zone en route to the 155.00 psychological mark and the July 30 swing high, around the 155.20 region.
On the flip side, any meaningful corrective slide now seems to find decent support near the 152.00 round figure. A convincing break below could drag the USD/JPY pair further towards the 151.45-151.40 intermediate support en route to the 151.00 mark, though the fall might still be seen as a buying opportunity. This should help limit the downside near the aforementioned confluence resistance breakpoint, now turned support, near the 150.65 region, which should now act as a strong base for spot prices. Sustained weakness below, however, will suggest that the upward momentum has run out of steam and shift the near-term bias in favor of bearish traders.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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