Dollar Weakness Will Remain Key Driver

Japanese Yen (USD/JPY) Prices and Analysis

The Japanese yen was a major beneficiary of broad United States Dollar weakness in the past week, after the US Federal Reserve’s monetary policy decision, and the greenback is likely to remain in the USD/JPY driving seat in the coming days, even if some more domestic, Japanese drivers may be coming soon. This means more relative Yen strength is highly likely, even if simple market exhaustion may mean it’s not as marked as it has been.

After all, the pair has been sliding pretty consistently in response to the monetary policy outlook since October 2022, as can be clearly seen on its daily chart.

Chart Compiled Using TradingView

Fed’s ‘Dovish Hike’ Hits Dollar

The Fed raised interest rates yet again on March 22, but a clear modification of its forward-guidance language has markets upping their bets that borrowing costs won’t rise much further in the world’s largest economy and that the terminal rate will top out some distance below the 5.7% markets were predicting just weeks ago.

The Fed funds target range stands at 4.75%-5%, and, while markets are pretty sure it will go higher yet. ‘not much higher’ seems to be the consensus.

This view has seen the Dollar weaken across the board, and, while this may be a rational market response, it’s important to remember that the Fed is above-all mandated to fight inflation and that, while pricing power remains strong, further rate rises will remain on the cards whatever markets might wish. No one at the Fed thinks rates will be coming down in 2023.

Japanese Inflation Picture Mixed

Headline Japanese inflation relaxed a little last month, according to official figures. The Consumer Price Index rose by 3.3%, a full percentage point below January’s rise. However, there was much less comfort for policymakers in the ‘core’ readings, which strip out the volatile effects of food and fuel prices. Inflation remained stubbornly strong, with one measure at forty-year peaks.

This will be what incoming Bank of Japan Governor Ueda Kazuo will have to face when he takes office from the long-serving Haruhiko Kuroda on April 8. The Japanese government is reportedly concerned about the central bank’s longstanding and aggressive policy of monetary easing and, while it is only likely to be tweaked by the new Governor, even that could offer the Japanese Yen more domestic support than its been used to for many years.

Those are matters for the medium term, however. The coming week will bring possible trading opportunities around key data points. The first likely candidate is the final look at US fourth-quarter Gross Domestic Product data for 2022. That’s coming up on Thursday, with the previously reported 3.2% rise under scrutiny.

The same day brings Japanese unemployment, retail sales, and industrial production numbers.

China’s March manufacturing Purchasing Managers Index will give a snapshot of how the world’s second-largest economy is emerging from draconian Covid lockdowns- a key worry for Japan’s vast export sector.

The impact of all these on USD/JPY is likely to be short, however, with monetary policy differentials continuing to run the table.

–By David Cottle for DailyFX