• The Japanese yen continued its recovery against the US dollar as focus shifted to the upcoming interest rate decisions from the Bank of Japan (BoJ) and the US Federal Reserve next week.
• According to reliable trading platforms, the USD/JPY exchange rate fell to its lowest level at 156 on Tuesday and is now around the 154.50 support level, down from its monthly high of 161.76.

(Click on image to enlarge) 

BoJ hikes interest rates and interventions

The USD/JPY exchange rate has been modestly lower in the past few days as investors focus on the Bank of Japan’s interventions. Recent data shows that the Bank of Japan has spent more than $22 billion in the forex market to prevent the yen from collapsing. In a note at the time, an analyst at Mitsubishi UFJ wrote: “The timing of the intervention was unexpected. They wanted to show that they have many ways to intervene as this battle continues with no clear sign of light at the end of the tunnel.”

This year’s interventions are the Bank of Japan’s largest since 2022 when it spent more than $66 billion as the currency weakened. The next important Japanese economic figures are due on Wednesday when S&P Global and au Jibun Bank release their manufacturing and services PMI numbers for the month. Also. the country’s statistics agency will release the latest Tokyo consumer price inflation figures on Friday. Furthermore, economists expect the data to show that inflation in the city edged up slightly in July to 2.2%, above the Bank of Japan’s target of 2.0%. Moreover, the Tokyo CPI figure is important because it is the country’s largest city with a population of more than 13.9 million. The most important catalyst for USD/JPY will come next week when the Bank of Japan issues its interest rate decision. With inflation remaining above the 2% target, analysts expect the Bank of Japan to raise interest rates for the second time this year. Analysts at Barclays expect the Bank of Japan to raise interest rates by 0.25%, while others expect a smaller cut of 0.15%. Likewise, the expectation of a rate hike explains why the Japanese yen has been bouncing back recently. Accordingly, an analyst at Nomura Securities said in a statement:

“If the yen continues to trade weak at the July meeting, the bank will need to consider an early rate hike even as it decides on the pace of cuts in Japanese government bond purchases.”

US PCE data and Fed decision

Also, USD/JPY fell ahead of Friday’s US personal consumption expenditure (PCE) data. This is an important inflation figure that the Fed pays close attention to because it looks at price changes in rural and urban centres. Additionally, it is an important report because it accompanies personal spending and income figures, which the Fed pays close attention to. Economists believe the latest PCE data will show that prices continued to decline in June, for the third straight month. If that is correct, it would give the Fed the incentive to start cutting interest rates in September.

Also, the Federal Reserve will meet next week and will issue its interest rate decision on Wednesday. The consensus view is that the bank will not raise interest rates this time. Instead, officials will maintain their recent tone welcoming inflation data and committing to cutting rates later this year.

The most important data to watch is the US non-farm payrolls (NFP) figures for July, which will be released next week. If the data shows that the unemployment rate continued to rise in July, the odds of a cut in September will jump significantly. In a recent statement, Jerome Powell indicated that he is comfortable cutting US interest rates even with inflation above the 2.0% target. He indicated that the bank is now more concerned about the Labor market.

The next major monetary event in August will be the Jackson Hole Symposium, where the Fed will lay the groundwork for a US interest rate cut in September. Clearly, Jackson Hole is a summit where central banks from many advanced economies meet and discuss monetary policy.

USD/JPY Technical analysis and Expectations Today

Moving to the daily chart, we see that the USD/JPY exchange rate peaked at a multi-decade high of 161.76 last week and then pulled back as the Bank of Japan intervened. Now, it has fallen below the 50-day moving average and the lower side of the ascending channel. These are signs that the downtrend is gaining momentum. Also, the USD/JPY exchange rate has moved below the psychological level of 155. Meanwhile, the chart indicator bars have moved below the zero line while the RSI has declined.

Therefore, the pair may continue to decline as sellers target the key support level at 151.91, the high of November last year. Further downside will be confirmed if it moves below this level. Finally, the alternative scenario is a USD/JPY bounce as buyers try to retest the psychological point at 160.

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