- The Japanese yen continued to gain strength against the US dollar for the fourth consecutive day on Friday.
- The Bank of Japan’s (BOJ) interest rate hike supports the yen despite Japan’s weak Q1 GDP report.
- Speculation about further interest rate cuts by the Federal Reserve puts downward pressure on the US dollar, impacting USD/JPY rates.
The Japanese Yen (JPY) remains strong against the US dollar, reaching a new weekly high during Friday’s Asian trading session. This upward movement is primarily driven by the Bank of Japan’s increased willingness to raise interest rates again come 2025. Interestingly, even positive talks regarding US-China trade agreements aren’t enough to diminish the optimistic sentiment surrounding the JPY.
On the other hand, the US dollar (USD) is struggling to address inflation and attract buyers, especially with weak consumer spending data that reinforces projections for additional rate cuts by the Federal Reserve. This has caused the USD/JPY pair to fall below the critical level of 145.00. The differing policy expectations from the BOJ suggest that a trend of lower JPY could persist.
Japan’s Yen Holds Steady Amid Weak Q1 GDP and BOJ Expectations
- A report from the Japanese Cabinet Office released earlier indicated a 0.2% contraction in Q1 2025, marking a decline from a 0.1% drop and a 0.6% growth in the last quarter. This annual contraction places Japan’s GDP significantly below the expected 0.7% growth for the January-March period, indicating its first year-over-year decline.
- Earlier this week, a summary of opinions from the BOJ, dated from April 30 to May 3, showed that policymakers are not ruling out further interest rate hikes. Some board members even discussed resuming rate hikes following a temporary pause if US tariffs stabilize. Moreover, the BOJ’s deputy governor reaffirmed this rate-hiking intention on Tuesday.
- A Reuters survey released Thursday revealed that many economists anticipate the BOJ will maintain current interest rates through September, with the possibility of a modest hike of at least 25 basis points by year-end. This expectation is partly supported by Japan’s chief trade negotiator, who plans to visit Washington next week for consultations with the US.
- The report also noted that Japan is considering a set of proposals aimed at securing concessions. Akazawa, the trade negotiator, stated the government will keep requesting a review of US tariffs and implement necessary measures to assist affected companies. Previously, Japan’s Finance Minister mentioned a desire to meet with the Treasury Secretary to discuss foreign exchange in line with prior agreements.
- The US and China have agreed to eliminate potentially harmful trade disputes and pause tariffs for at least 90 days. Additionally, US President Trump has indicated he might engage directly with Chinese President Xi Jinping regarding the trade deal. This, along with the Federal Reserve’s potential policy easing, appears to have little effect on safe-haven JPY but tends to uphold a positive risk atmosphere.
- Data from the U.S. Bureau of Labor Statistics on Thursday revealed a 0.5% drop in the US Producer Price Index (PPI) in April, with an annual increase of 2.4%. The core PPI rose by 3.1% for the same month, down from 4% in March, suggesting that manufacturers’ product prices are easing.
- Additionally, the US Department of Commerce reported a 0.1% increase in retail sales for April, a significant drop from the revised increase of 1.7% the previous month. This trend supports concerns about slower economic growth in the US, fueling expectations that the Federal Reserve may have to lower interest rates further, which in turn negatively impacts US Treasury bonds and places the US dollar on the defensive.
USD/JPY Technical Setup Indicates Potential Further Losses Below 145.00
From a technical perspective, the recent downturn has pushed the USD/JPY pair below the 38.2% Fibonacci retracement level from recent lows. With daily chart oscillators just starting to show negative movement, a sustained position below the psychological level of 145.00 could see prices drop to around 144.55, which aligns with the 200 Simple Moving Average (SMA) breakout levels on the 4-hour chart, closely followed by the 50% Fibo level near 144.30. A significant drop below these support levels might shift sentiment in favor of bearish traders, opening the door to deeper declines.
On the other hand, the peak during the Asian session around the 145.70 region is currently a key resistance point ahead of the round 146.00 figure. Any further uptick might present a selling opportunity, especially near the 146.60 area or the 23.6% Fibo level. However, if prices manage to push through this level, it could incite a short-covering rally, lifting the USD/JPY beyond the 147.00 mark toward the 148.00 level and the 147.70 medium threshold.
