The Bank of Japan (JPY) started the new week on a muted note amid mixed fundamental signals.
Positive risk sentiment supported the Japanese yen (JPY), but hawkish BoJ expectations limited downside.
Traders also seemed hesitant ahead of key BoJ and Fed policy decisions this week.
The Bank of Japan (JPY) fluctuated between slim gains/small losses against its US counterpart during Monday’s Asian session amid mixed fundamental signals. Optimism from China’s stimulus announcement over the weekend was evident in the generally positive tone of Asian equities. This in turn was seen as a key factor weakening the safe-haven yen (JPY).
However, any meaningful yen depreciation remains elusive amid the divergence in policy expectations between the Federal Reserve (Fed) and the Bank of Japan (BoJ). Moreover, geopolitical risks and concerns over the economic impact of U.S. President Donald Trump’s tariffs also supported the Japanese yen (JPY). Apart from this, the underlying bearish sentiment around the U.S. dollar (USD) should limit the downside for the USD/JPY pair.
Traders may avoid aggressive directional bets and opt for a wait-and-see approach ahead of this week’s key central bank event risk – the BoJ and Fed policy decisions on Wednesday. This calls for caution for yen bears and to prepare for an extension of the USD/JPY pair’s rally from the multi-month lows of the 146.55-146.50 region hit last Tuesday.
China’s State Council announced a special action plan on Sunday aimed at stimulating domestic consumption and rolled out measures to boost household income. In addition, Shenzhen, China, eased its housing provident fund loan policy to stimulate the property market and clear backlogs. This in turn boosted investor confidence and weakened the safe-haven yen (JPY) during Monday's Asian trading session.
The results of Japan's annual spring labor negotiations, which concluded on Friday, showed that companies offered average wage increases of more than 5% for at least the second consecutive year to help workers fight inflation and address labor shortages. Higher wages are expected to boost consumer spending and push inflation higher, giving the Bank of Japan a new reason to continue raising interest rates.
Meanwhile, traders continued to increase bets that the Federal Reserve will cut interest rates several times this year as the likelihood of a recession due to U.S. President Donald Trump's trade tariffs rises. A survey from the University of Michigan confirmed this expectation on Friday, showing that the consumer confidence index plunged to a nearly 2-and-a-half-year low in March.
This, coupled with soft U.S. inflation data released last week and signs of a cooling labor market, suggests that the U.S. central bank may resume its policy easing cycle in June. Moreover, market participants are currently pricing in the possibility of a 25 basis point rate cut by the Federal Reserve at each of its July and October monetary policy meetings, which has kept the dollar near multi-month lows.
Houthi leader Abdul Malik al-Houthi said on Sunday that his militants would target American ships in the Red Sea as long as the United States continues its offensive on Yemen. This came a day after a deadly US airstrike that the Houthi-controlled Health Ministry said killed at least 53 people. In response, the US Defense Secretary said on Sunday that the United States will continue to attack the Houthis in Yemen until they stop their attacks on shipping.
At least nine people, including three journalists, were killed in an Israeli drone strike in northern Gaza on Saturday, according to Palestinian media reports. The Israeli military said its forces have intervened to stop threats from terrorists who approach its forces or plant bombs since the ceasefire came into effect on January 19. The Israeli military said six men identified as Hamas militants were killed in the attack.
Traders are now looking to the US economic calendar – including the release of monthly retail sales and the New York State manufacturing index – to gain some momentum during the North American trading session. However, the focus will remain on the key Bank of Japan decision on Wednesday. This, along with the outcome of the two-day FOMC meeting, should provide fresh directional momentum to the USD/JPY pair.
From a technical perspective, the recent multiple failures to find support above the 149.00 mark, as well as negative oscillators on the daily chart, are in favor of bearish traders. However, a sustained strong break above this level followed by a break above last week’s swing high in the 149.20 area could trigger a short-term covering rally and push the USD/JPY pair towards the 150.00 psychological level. The momentum could extend further to the 150.65-150.70 area towards the 151.00 level and the monthly high in the 151.30 area.
On the other hand, the 148.25 area could protect the immediate downside ahead of the 148.00 level. If some follow-through selling occurs below the 147.75-147.70 level, it could put the USD/JPY pair at risk of accelerating its decline towards the 147.00 level and ultimately to the 146.55-146.50 area, or the lowest level since October hit last week. A successful break above the latter would be seen as a new trigger for bearish traders and pave the way for further declines.
The Japanese yen (JPY) is one of the most traded currencies in the world. The value of the yen depends on the performance of the Japanese economy in general, but more specifically on factors such as the Bank of Japan's policy, the difference between Japanese and US bond yields, or traders' risk sentiment.
"One of the BoJ's mandates is monetary control, so its actions are critical to the yen. The BoJ sometimes intervenes directly in foreign exchange markets, usually to weaken the value of the yen, although it does not usually do so due to political concerns among major trading partners. The BoJ's ultra-loose monetary policy between 2013 and 2024 led to a depreciation of the yen against major currencies as policy divergences between the BoJ and other major central banks grew. More recently, the gradual withdrawal of this ultra-loose policy has provided some support to the yen."
Over the past decade, the BoJ has maintained its ultra-loose monetary policy stance, leading to a widening policy divergence with other central banks, especially the Federal Reserve. This has supported a widening spread between the 10-year US Treasury bond and the 10-year Japanese government bond, which has benefited USD/JPY. The Bank of Japan's decision to gradually move away from its ultra-easy policy in 2024, coupled with rate cuts by other major central banks, is narrowing that gap.
The yen is often viewed as a safe-haven investment. This means that during times of market stress, investors are more likely to put money into the yen because of its perceived reliability and stability. Turbulent times can cause the yen to appreciate against other currencies that are viewed as riskier investments.