By Linh Tran, Market Analyst at XS.com
USDJPY at one point moved toward 157.9 last week, reflecting the sharp divergence in monetary policy between the United States and Japan. However, the pair has retreated this week as the market is adjusting its expectations regarding both the Fed and the BoJ.
The short-term trend of USDJPY is beginning to show signs of slowing. The key factors impacting the exchange rate are not only U.S. Treasury yields or policy differentials, but also Japan’s expected policy adjustments and the clearly rising risk of foreign-exchange intervention.
Although the USD has temporarily pulled back from the 100-point level, it still maintains certain buying momentum thanks to the relatively stable U.S. economy. In addition, the market is leaning toward the scenario in which the Fed will cut interest rates at the upcoming December meeting. The increase in rate-cut expectations has been the main reason why the USD has come under corrective pressure recently, particularly as recent U.S. inflation data shows a clear downward trend in core PCE.
The possibility that the Fed may begin its easing cycle earlier than expected could help narrow the interest-rate advantage of the greenback compared with other currencies, including the JPY.
On the Japanese side, the Japanese Yen is gradually receiving renewed support as Bank of Japan officials have recently delivered more “hawkish” signals compared with the previous period. Statements from BoJ member Asahi Noguchi, who emphasized the need to raise interest rates gradually to control inflation and limit the negative impact of a weak Yen on import costs, have reinforced expectations that the BoJ is preparing to enter a stronger tightening phase. Inflation in Tokyo continues to remain above the 2% target, indicating that price pressures in Japan have not cooled, making it difficult for the BoJ to maintain an overly “dovish” stance as before.
USDJPY moving toward the 52-week high around 158.8 is increasing the risk of verbal intervention or direct large-scale Yen purchases. Whenever warnings from Japan’s Ministry of Finance appear in the market, speculative sentiment in USDJPY immediately cools down, causing long positions to become more cautious. This factor has partially limited the upward momentum of USDJPY in recent sessions.
The short-term outlook for USDJPY is tilting toward a potential downside correction after an extended period of gains. Expectations of Fed rate cuts, upward pressure on interest rates from the BoJ, and Japan’s foreign-exchange intervention risk are all significant headwinds for the pair. However, if U.S. economic data delivers a major positive surprise, the USD may still recover and support USDJPY in retesting higher resistance zones.