The USD/JPY pair saw a significant decline below the 141.00 level early Friday, nearing its lowest point since the beginning of the year.
This decline follows a two-month downward trend, driven by the weakening US dollar and the increasing strength of the Japanese yen. But will this downward trend continue, or are we on the verge of a potential correction?
The primary driver behind the US dollar’s decline has been the growing expectations that the Federal Reserve may move towards easing its monetary policy significantly.
On the back of weaker economic data, particularly after the release of the US Producer Price Index (PPI), which came in weaker than expected, bets on a potential 50 basis point interest rate cut by the Fed at the end of next week’s meeting have intensified.
Investors are now pricing in more than a 40% chance of such a cut, reflecting market concerns over slowing economic growth and its impact on the dollar.
This shift in expectations has led to a drop in US Treasury yields, which, in turn, has pulled the USD/JPY pair down. Lower yields reflect a weaker dollar, as investors shift away from the greenback in favor of other currencies like the Japanese yen.
In my view, this development is a clear sign of a shift in US monetary policy, putting increasing pressure on the dollar. As long as these expectations persist, the dollar is likely to remain under pressure, indicating that the USD/JPY pair may continue its decline.
On the other hand, the Japanese yen continues to gain strength, supported by hawkish signals from the Bank of Japan (BoJ). BoJ board member Naoki Tamura made hawkish comments on Thursday, suggesting that interest rates could be raised if economic forecasts align with future expectations. I believe these signals are driving increased demand for the yen, which now seems more attractive given the potential for rising interest rates.
Tamura also indicated that while the path to ending the BoJ’s accommodative monetary policy is still long, there is a possibility of reaching a 1% interest rate by the second half of 2025. In my view, this stark contrast between Japan’s monetary policy and the Federal Reserve’s dovish outlook enhances the yen’s appeal, contributing to the downward pressure on the USD/JPY pair.
This suggests that the BoJ is moving steadily toward raising rates despite global economic challenges, meaning the yen will continue to receive support in the near future. While US policy remains uncertain, Japan appears to be in a better position to manage interest rates and currency stability.
Despite these developments, some traders may prefer to hold off on making final decisions due to the upcoming central bank risks next week. The Federal Reserve is set to announce its rate decision on Wednesday, followed by a BoJ policy update on Friday. These events could set the stage for the next directional move in the USD/JPY pair.
In my opinion, these events will be crucial in determining the next phase, especially given the recent market volatility. The general trend suggests further declines if the Fed continues to signal a shift toward policy easing, while the pair could stabilize if the BoJ’s decisions are less hawkish than expected.
In addition to central bank decisions, investors will be focusing on the preliminary Michigan Consumer Sentiment Index data for September, which will be released on Friday. The forecast points to the index remaining steady at around 68.0, compared to the previous reading of 67.9. These figures will offer further insights into how confident US consumers are in the domestic economy, which could, in turn, influence Fed expectations and market direction.
However, I believe that while this data is important, it may not be enough to counter the significant dollar decline if the Fed continues on its path to easing monetary policy. Any positive surprises in the data, though, could provide temporary support for the dollar and help slow the current decline.
Given this fundamental and political backdrop, the path of least resistance for the USD/JPY pair remains to the downside. The pair could continue to fall if expectations of a US rate cut persist, while the Japanese yen is likely to maintain its strength due to Japan’s more hawkish monetary policy stance.
Based on these factors, the USD/JPY pair is set to remain on a downward trajectory in the near term, marking its second consecutive week in the red, reflecting the significant challenges facing the US dollar at present.
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