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USD/JPY remains on the defensive below 141.00 as bets on a major rate cut by the Fed are high

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USD/JPY remains on the defensive below 141.00 as bets on a major rate cut by the Fed are high

  • USD/JPY recovers to near 140.80 during Tuesday’s early Asian session.
  • The US Federal Reserve is widely expected to cut interest rates after its meeting on Wednesday.
  • Analysts expect no change in interest rates at the BOJ meeting on Friday.

The USD/JPY pair recovered some lost ground around 140.80, snapping a five-day losing streak during the early Asian session on Tuesday. However, the pair’s uptrend may be limited amid growing expectations that the US Federal Reserve (Fed) will kick off its easing cycle at its September meeting. Later this week, the US Fed and Bank of Japan (BoJ) monetary policy meeting will be in the spotlight.

The US dollar (USD) remains under pressure as expectations for Fed easing grow. Fed Chairman Jerome Powell indicated last month at the Kansas City Fed’s annual economic symposium in Jackson Hole that inflation was under control just enough for the Fed to finally feel comfortable rolling back policy. Powell added that the fragile health of the labor market is a key reason the Fed is ready to act.

The market is raising expectations for a jumbo 50 basis point (bps) cut at the Fed’s September meeting on Wednesday, with nearly 67% odds priced in, up from 50% last Friday. Ahead of key rate decisions in both the US and Japan, the US Census Bureau is set to release its Retail Sales report on Tuesday. The figure is expected to rise 0.2% MoM in August, up from 1.0% previously.

On the other hand, the BoJ is not expected to raise interest rates on Friday, but a majority of economists polled by Reuters expect a hike by the end of the year. Richard Kaye, a portfolio manager for Japanese equities at Comgest, noted: “The main driver of the yen is the interest rate or yield gap with the U.S., and the main player in that is the Fed, and the Fed looks set to cut.”

Frequently Asked Questions about the Japanese Yen

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by the policy of the Bank of Japan, the difference between Japanese and U.S. bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its actions are critical to the yen. The BoJ has at times intervened directly in currency markets, generally to devalue the yen, although it often refrains from doing so due to political concerns among its major trading partners. The BoJ’s current ultra-loose monetary policy, based on a massive stimulus to the economy, has caused the yen to fall against its major peers. This process has been exacerbated recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to combat multi-decade high inflation.

The BoJ’s stance of sticking to an ultra-loose monetary policy has led to a growing policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening of the spread between the 10-year US and Japanese bonds, which favours the US dollar against the Japanese yen.

The Japanese Yen is often seen as a safe haven investment. This means that in times of market stress, investors are more likely to put their money into the Japanese currency due to its perceived reliability and stability. Turbulent times are likely to strengthen the value of the Yen against other currencies that are seen as riskier to invest in.

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