The Japanese Yen began the week on a weaker note, largely influenced by domestic political instability following the resignation of Prime Minister Shigeru Ishiba. His departure raises uncertainties regarding the timing of the Bank of Japan’s (BoJ) policy normalization, potentially impeding the path toward expected interest rate hikes.
Despite these challenges, the Yen managed to offset some of its initial losses against a subdued US Dollar. This was driven by expectations of a more aggressive monetary policy easing by the Federal Reserve, reinforced by Friday’s disappointing Nonfarm Payrolls data, which showed only 22,000 new jobs added in August, well below market expectations. Additionally, the labor market has started to show some signs of weakness, with revisions indicating a loss of 13,000 jobs in June, marking the first month of decline since December 2020.
On the economic front, Japan showed positive signs with stronger-than-anticipated private spending data and an upward revision of its Q2 GDP growth, now reported at an annualized rate of 2.2%. This growth is much more robust than the initial estimate of 1.0%, suggesting that the economic outlook remains stable. Such economic indicators contribute to ongoing market speculation about potential BoJ rate hikes later this year.
The US Dollar’s weakness has also limited further losses for the Yen despite the broader hawkish sentiment surrounding the BoJ. The interest rate outlook for the Fed is increasingly dovish, with traders now considering the possibility of a rate cut later this month, spurring a decline in US Treasury bond yields. This dovish sentiment supports the notion that the USD may struggle to gain momentum against its peers, including the Yen.
Prime Minister Ishiba’s abrupt exit adds a layer of complexity to Japan’s political landscape, leading the Liberal Democratic Party to organize an emergency leadership election. This instability is likely to impact investor confidence and affect the timing of the anticipated BoJ policy adjustments.
From a technical standpoint, the USD/JPY pair has encountered resistance near the 200-day Simple Moving Average, observed at around 148.75. Should the pair breach this level firmly, it could potentially see further gains towards 150.00 and beyond. However, a drop below the 148.00 threshold could mitigate bullish sentiment, steering the pair towards lower support levels around 147.45-147.40.
The upcoming economic data releases, notably the Producer Price Index (PPI) and Consumer Price Index (CPI) in the US, will be crucial in shaping market expectations and influencing monetary policy speculations for both the Fed and BoJ.
