Japanese Yen remains stronger due to hawkish mood surrounding the BoJ, US data eyed – FXStreet

• The Japanese yen strengthened as further interest rate hikes by the Bank of Japan became more likely.
• The yen could face challenges due to political uncertainty, with Prime Minister Fumio Kishida not seeking re-election in September.
• The US dollar is facing pressure from falling Treasury yields and growing expectations of a Fed rate cut.

The Japanese Yen (JPY) rebounded against the US Dollar (USD) on Friday, likely due to recent growth in Japan’s second-quarter GDP, which is encouraging the possibility of a near-term interest rate hike by the Bank of Japan (BoJ).

However, the yen could face difficulties due to political uncertainty in Japan following reports that Prime Minister Fumio Kishida will not run in the party leadership election in September, effectively ending his term as prime minister.

The USD/JPY pair is trending lower as the US Dollar weakens due to a fall in US Treasury yields. Moreover, traders are fully pricing in a 25 basis point interest rate cut by the US Federal Reserve in September, according to the CME FedWatch tool.

However, recent better than expected US economic data helped ease market fears of a US recession, providing support to the US dollar. Additionally, flash US Michigan Consumer Sentiment Index for August and building permits for July will be in focus in the later North American session.

Daily Digest Market Trends: Japanese yen strengthens on hawkish mood at Bank of Japan

• On Thursday, the U.S. Census Bureau reported that U.S. retail sales rose 1.0% month-over-month in July, a sharp turnaround from a 0.2% decline in June and above the expected 0.3% increase. Additionally, initial jobless claims for the week ending August 9 were 227,000, below the expected 235,000 and down from 234,000 the previous week.
• Japan’s economy is expected to recover gradually as wages and incomes improve, Yoshitaka Shindo, the country’s minister of economy, trade and industry, said on Thursday, adding that the government would work closely with the Bank of Japan to implement flexible macroeconomic policies.
• Japan’s gross domestic product (GDP) grew 0.8% quarter-on-quarter in the second quarter, beating market expectations of 0.5% and recovering from a 0.6% contraction in the first quarter. This was the strongest quarterly growth since the first quarter of 2023. Meanwhile, annualized GDP growth reached 3.1%, beating the market consensus of 2.1% and reversing a 2.3% contraction in the first quarter. This was the strongest annual expansion since the second quarter of 2023.
• Federal Reserve Bank of Chicago President Austin Goolsby said on Wednesday he was more concerned about the labor market than inflation, pointing to weak employment data while price pressures have improved recently. Goolsby added that the extent of the rate cut would depend on current economic conditions, according to Bloomberg.
• The U.S. headline consumer price index (CPI) rose 2.9% year-on-year in July, down slightly from June’s 3% increase and below market expectations. Core CPI, which excludes food and energy, rose 3.2% year-on-year, down slightly from June’s 3.3% increase but in line with market expectations.
• Prime Minister Fumio Kishida announced at a press conference on Wednesday that he would not run in the September election for the presidency of the Liberal Democratic Party. Kishida stressed the need to fight Japan’s deflationary economy by promoting wage and investment growth and achieving his goal of expanding Japan’s GDP to 600 trillion yen.
• Jane Foley, senior FX strategist at Rabobank, said a flurry of US data this week and the Jackson Hole meeting next week will give the market a clearer insight into the potential response from US policymakers, but their main expectation is that the Fed will likely cut interest rates by 25 basis points in September and further by the end of the year.

Technical reasons why: USD/JPY is dropping towards 148.50 with the next support at the 9-day EMA.

USD/JPY is trading around 148.80 on Friday. Daily chart analysis shows that the pair is above the 9-day Exponential Moving Average (EMA), indicating a short-term bullish trend. Still, the 14-day Relative Strength Index (RSI) is below 50, meaning any further upside would confirm the bullish momentum.

In terms of support levels, the USD/JPY pair is likely to encounter immediate support at the 9-day EMA near 148.09. If the pair sinks below this level, it will strengthen the bearish outlook and may push the pair down towards the seven-month low of 141.69, recorded on August 5. If the decline continues, the pair may approach the next support level at 140.25.

On the upside, the USD/JPY pair may head towards the 50-day EMA at 153.08 and may test the resistance level at 154.50 which has transitioned from a previous throwback support to a current pullback resistance.

USD/JPY: Daily Chart