Japanese Yen hangs near daily low against USD; hawkish BoJ expectations to limit losses
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Haresh Menghani
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28 Jan @ 02:31 (GMT+0)

Japanese Yen hangs near daily low against USD; hawkish BoJ expectations to limit losses

  • The Japanese Yen retreated further from a multi-week high touched against the USD on Monday.
  • Trump’s tariff threats, rebounding US bond yields and modest USD strength support USD/JPY.
  • The divergent BoJ-Fed expectations might keep a lid on any further upside for the currency pair.

The Japanese Yen (JPY) remains on the back foot against its American counterpart, with the USD/JPY pair eyeing the 156.00 mark during the early European session on Tuesday. US President Donald Trump reiterated his push for higher universal tariffs, which could reignite inflationary pressures in the US. This, in turn, triggers a modest recovery in the US Treasury bond yields, which undermines the lower-yielding JPY and revives the US Dollar (USD) demand.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, stages a solid rebound from its lowest level since December 18 touched on Monday and provides an additional boost to the USD/JPY pair. That said, the divergent Bank of Japan (BoJ)-Federal Reserve (Fed) policy expectations could limit the JPY losses and cap the USD. Traders now look to the US macro data for some impetus ahead of a two-day FOMC meeting starting later today.

Japanese Yen remains heavily offered amid concerns about Trump's push for higher tariffs

  • US President Donald Trump said he would soon impose tariffs on producers of pharmaceuticals and computer chips in the near future. I will also place tariffs on aluminum and copper, and look at steel and other industries for tariffs.
  • This comes after Trump ordered his administration to impose emergency 25% tariffs on Colombian imports, though the duties were put on hold after the latter agreed to unrestricted acceptance of all illegal migrants returned from the US.
  • The Financial Times reported on Monday that Scott Bessent, who was confirmed as the US Treasury Secretary, is pushing for tariffs on all imports to start at 2.5% and to increase it gradually by the same amount every month.
  • The yield on the benchmark 10-year US government bond moves away from over a one-month low touched the previous day, which helps revive demand for the US Dollar and undermines the lower-yielding Japanese Yen.
  • The Bank of Japan reiterated last week, after raising rates to the highest since 2008, that it will continue to raise the policy rate and adjust the degree of monetary accommodation if the outlook presented at the January meeting is realized. 
  • Moreover, the leaders of Japan's top business lobby and labor unions have agreed on the need to maintain the momentum for pay hikes again this year, which should allow the BoJ to tighten its policy further and help limit JPY losses. 
  • The BoJ announced that it would provide ¥200 billion through the outright purchase of commercial paper. Separately, Japan's Economy Minister Ryosei Akazawa said that he will closely monitor the impact of the rate hike on the economy. 
  • Traders now look to Tuesday's US economic docket – featuring Durable Goods Orders, the Conference Board's Consumer Confidence Index and the Richmond Manufacturing Index – for some impetus later during the US session.
  • The focus, however, will remain glued to the outcome of a two-day FOMC monetary policy meeting, starting this Tuesday, which will influence the USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. 

USD/JPY needs to find acceptance above the 156.00 mark to support prospects for further gains

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From a technical perspective, the overnight sustained breakdown below a multi-month-old ascending trend-channel support was seen as a key trigger for bearish traders. Moreover, oscillators on the daily chart have just started gaining negative traction. This, in turn, suggests that the path of least resistance for the USD/JPY pair is to the downside. Hence, any subsequent move up could be seen as a selling opportunity near the trend-channel support breakpoint, now turned resistance, around the 156.00 mark, which should cap spot prices near the 156.60-156.70 supply zone.

On the flip side, the 155.00 psychological mark now seems to protect the immediate downside ahead of the 154.55-154.50 horizontal zone, the 154.00 round figure and the overnight swing low, around the 153.70 region. Some follow-through selling will reaffirm the near-term negative outlook and drag the USD/JPY pair further towards the 153.30 intermediate support en route to the 153.00 mark.

Fed FAQs

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.