The Japanese Yen (JPY) is struggling to maintain modest gains, as doubts linger over the likelihood of further rate hikes by the Bank of Japan (BoJ) this year. Expectations that the BoJ may hold off on raising rates, along with uncertainty surrounding the new political leadership’s stance on monetary policy, are weighing on the JPY ahead of the general elections on October 27. However, verbal intervention from Japanese authorities has helped limit any significant decline in the JPY. Additionally, a slight pullback in the US Dollar (USD) from a recent high is expected to keep gains in check for the USD/JPY pair.
Comments from Japanese officials, including the vice finance minister and a government spokesperson, have fueled speculation about possible government intervention to stabilize the JPY. This, combined with hopes for stronger domestic inflation, which could allow the BoJ to raise rates, is likely to prevent a sharp decline in the JPY. Recent data showing a slowdown in Japan’s Consumer Price Index (CPI) has raised concerns about the BoJ’s capacity to continue raising rates, especially in light of Prime Minister Shigeru Ishiba’s hesitation to support further hikes. Despite this, the market has reacted minimally to Chinese macro data and upbeat US economic data, which could impact the USD.
On the technical side, the USD/JPY pair has broken above the 150.00 psychological level, indicating a potential bullish trend. Oscillators on the daily chart are still in positive territory, suggesting further upside for the pair. Any pullback is likely to find support around the 149.20 level, with additional support at the 149.00 mark. On the upside, a break above the 150.30 area could push the pair towards the August monthly high around 150.85-150.90. Positive momentum beyond 151.00 could lead to further gains towards the 152.00 level.
Monetary policy in the US is determined by the Federal Reserve (Fed), with the primary goal of achieving price stability and promoting full employment. The Fed uses interest rate adjustments to control inflation and unemployment rates. When inflation rises above the 2% target, the Fed raises interest rates to strengthen the USD. Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower interest rates to boost borrowing and weaken the USD. The Fed holds eight policy meetings per year to assess economic conditions and make monetary policy decisions.
In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase credit flow in the financial system. This unconventional policy involves the Fed printing more money to buy bonds from financial institutions during crises or low inflation periods. QE usually weakens the USD. Conversely, Quantitative Tightening (QT) is the opposite of QE, in which the Fed stops buying bonds and reinvesting maturing bond principals, resulting in a stronger USD. Understanding these policies and their implications can help traders navigate the forex market effectively.
