- The Japanese yen faces some selling pressure due to a mix of negative influences.
- The Bank of Japan (BOJ) has indicated a slower tapering than anticipated by 2026, while positive market sentiments are weighing on the JPY.
- Expectations regarding BOJ’s varied policies seem to limit the upside potential for USD/JPY.
The Japanese yen (JPY) is lagging behind the broadly strengthening US dollar (USD), despite a lack of aggressive selling, as many investors seem to think that the Bank of Japan (BOJ) will move towards normalizing its monetary policy soon. This sentiment has been bolstered by comments from BOJ Governor Kazuo Ueda in parliament. This creates a notable contrast with the Federal Reserve, which is reportedly considering lowering borrowing costs in 2025, thereby putting additional pressure on the JPY.
On top of that, ongoing geopolitical tensions stemming from the prolonged conflict between Russia and Ukraine, along with escalating trade disputes, continue to lend support to the safe-haven appeal of the JPY. Meanwhile, the BOJ is signaling a pace of bond purchases that goes beyond what was initially expected by 2026, highlighting the challenges that central banks face in withdrawing significant financial support. This scenario isn’t exactly favorable for bullish JPY sentiment, as a modest bounce for the USD, following a few weeks of decline, has maintained upward pressure on the USD/JPY pair during early European trading on Tuesday.
Still Holding Out on Rate Hikes, According to BOJ’s Ueda
- Makoto Sakurai, a former BOJ board member, mentioned on Tuesday that the central bank might pause its quarterly reductions in government bond purchases next year. He noted that there are concerns that continued cuts could elevate yields and complicate economic management.
- Recent meeting minutes between the BOJ and financial institutions from May highlighted a notable number of requests to either maintain or slightly adjust the pace of bond purchases starting in fiscal year 2026.
- Governor Kazuo Ueda reiterated that interest rates could rise further if the economy and inflation align with forecasts. However, he cautioned that substantial uncertainties regarding international trade policies and economic conditions necessitate cautious decision-making.
- On the other hand, current market assessments suggest a 70% likelihood that the Federal Reserve will implement at least a 25 basis point rate cut by year-end. Additionally, the Chicago Federal Reserve President, Austan Goolsbee, mentioned that rate reductions will occur once uncertainties around tariff policies are resolved.
- Economically, the Institute of Supply Management (ISM) survey released on Monday indicated that US manufacturing activity has contracted for three consecutive months, with the manufacturing PMI dropping to 48.5 in May from 48.7 in April, below expectations of 49.5.
- Russia and Ukraine engaged in their second set of negotiations on Monday aimed at resolving the three-year war amidst rising hostilities. Notably, Ukraine launched an unexpected offensive into Russian airspace, while Russia countered with a large-scale deployment of drones and missiles just before talks began.
- Russia dismissed any unconditional ceasefire and stated its willingness to end combat only if Ukraine concedes significant territory and agrees to restrictions on its military. This continues to heighten geopolitical uncertainties, limiting the JPY’s depreciation.
- Traders are keenly awaiting the upcoming US job openings data. This, combined with comments from influential FOMC members, is likely to influence demand for the USD and provide some momentum for the USD/JPY pair, while they remain focused on monthly employment figures in the US, particularly the Non-Farm Payroll (NFP) report.
USD/JPY Struggles to Move Past 143.00
From a technical perspective, the recent drop below the horizontal support level of 143.65-143.60, which aligns with the 200-hour simple moving average (SMA), has been interpreted as a significant signal for USD/JPY bearishness. Those support levels may provide indicators for subsequent movements during the day. If the USD holds strength, we could see a rally that pushes prices to around 144.00, although risks may arise near the supply zone around 144.40-144.45.
Conversely, if the decline reverses to the 143.00 mark, some support may be found during Asian trading around the 142.40-142.35 range, followed by the 142.10 zone, which is the lower swing point from last week. The USD/JPY pair could continue to retreat from May’s monthly highs, further declining towards the next support level around 141.60, potentially reaching 141.00.
