Japanese Yen Consolidates as US Dollar Holds Firm Amid Rising Treasury Yields

The Japanese Yen (JPY) remained steady against the US Dollar (USD) on Tuesday, supported by the hawkish outlook on the Bank of Japan’s (BoJ) interest rate policy. Traders are cautiously awaiting the BoJ’s policy decision on Friday, expecting rates to remain unchanged but with the possibility of hikes in October and December.

Japanese Finance Minister Shunichi Suzuki emphasized on Tuesday that rapid foreign exchange (FX) fluctuations are undesirable, signaling that officials will closely monitor how these movements impact the Japanese economy. The government remains vigilant about the Yen’s strength and will take necessary actions, according to Reuters.

Meanwhile, the US Dollar is holding ground as expectations mount that the Federal Open Market Committee (FOMC) may announce a significant 50 basis point rate cut on Wednesday. The CME FedWatch Tool shows that markets are pricing in a 38.0% chance of a 25 basis point cut, while the likelihood of a 50 basis point cut has risen to 62.0%, up from 50.0% just a day prior.

Market Movers: Japanese Yen Steady Amid Dovish Fed Expectations

Rabobank economists Jane Foley and Molly Schwartz noted on Monday that net long positions in the Yen are at their highest levels since October 2016. While there is little expectation for a rate hike from the BoJ during its September 20 meeting, traders will be watching for signals of potential action in October.

Commerzbank FX analyst Volkmar Baur predicted that the BoJ would stay on the sidelines this week, suggesting that the Fed’s decisions will have a more significant impact on the USD/JPY pair. Baur noted that the Yen could fall below 140.00 per USD even without a BoJ rate hike.

On Friday, Fitch Ratings released a report suggesting that the BoJ may raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by 2026. Meanwhile, BoJ policymaker Naoki Tamura indicated that the central bank should aim for a rate of at least 1% by the second half of the next fiscal year, underscoring the BoJ’s commitment to monetary tightening.

In the US, the University of Michigan’s Consumer Sentiment Index rose to 69.0 in September, surpassing market expectations of 68.0 and marking a four-month high. This reflects improving consumer confidence in the US economy. Additionally, the US Producer Price Index (PPI) rose 0.2% month-on-month in August, beating the forecasted 0.1%, with core PPI increasing by 0.3%, exceeding both expectations and the previous month’s figure.

Technical Analysis: USD/JPY Remains Tepid Around 140.50 Amid 14-Month Lows

USD/JPY is hovering around 140.60 on Tuesday, continuing its downward trend within a descending channel, signaling a bearish outlook. The 14-day Relative Strength Index (RSI) remains below 30, indicating an oversold condition and a potential for an upward correction.

On the downside, the pair is testing support at 140.25, the lowest level since July 2023, followed by the psychological barrier at 140.00. A break below this level could strengthen the bearish sentiment and drive the pair toward the lower boundary of the descending channel at 138.30.

On the upside, resistance is expected around the nine-day EMA at 141.95, followed by the 21-day EMA at 143.78. A breakout above these levels could weaken the bearish bias and push the pair toward the upper boundary of the descending channel at 145.40.