The Japanese Yen (JPY) is down for the second consecutive day. At the same time, the US Dollar (USD) is holding a modestly positive bias. At market open during the Thursday Asian session, the USD/JPY pair inched toward the key 144.00 level. This continuous, rolling accumulation marks a new age of increased market volatility and economic speculation around both currencies.
Against this novel backdrop, US President Donald Trump is intensifying his assaults on Federal Reserve Chairman Jerome Powell. As a result, he’s now demanding that Powell resign immediately. Political pressure grows as public and private financial markets shift. Expectations are building for a 25 bps September rate cut. Indeed, the consensus among analysts is now predicting at least two cuts before the year is done.
Economic Indicators Weigh on the Yen
Today’s stunningly rampant economic data finds hiring in America is hardly even a trickle. This slowdown has led to fears of an impending spike in the unemployment rate. Analysts widely expect the central bank to raise the benchmark lending rate to a minimum of 4.3% in June, up from 4.2% in May. In the US, the widely watched ADP report was released on Wednesday and showed a larger-than-expected drop in private payrolls. June’s unexpected 33,000 job losses only fueled the fears.
Collectively, these indicators have fueled a negative sentiment for the JPY to flourish. This is doubly so with the specter of Trump’s additional tariffs on Japan hanging over them. Japan appears to be reluctant to purchase American-grown rice. This reluctance only serves to complicate an already strained economic relationship between the two countries.
If sellers are able to drive prices through the 143.40-143.35 area consistently, it will further establish a bearish outlook. This would drag spot prices down at least as far as the 143.00 level. If strength can hold above that 144.65 horizontal zone, we might see a short-covering rally get ignited. If so, this could force the USD/JPY currency pair through that ceiling and toward the next psychological round number barrier at 145.00.
Inflation Dynamics and Monetary Policy Divergence
Since mid-June, the Japanese Yen has fallen sharply. This decline is made worse by recent trade agreement between the US and Vietnam, which further undermines safe-haven assets including the JPY. Japan’s consumer inflation has recently exceeded the Bank of Japan’s (BoJ) 2% target. This trend has held steady for more than three years running. Japanese firms still further transmit escalating raw material prices to households, pushing up inflation rates.
The BoJ’s responsibility is defined by law, in two major areas – issuing banknotes and guiding monetary policy. Their mission is to ensure price stability with a target inflation rate of 2%. Yet a depreciating Yen coupled with skyrocketing international energy prices have driven inflation well above this target.
In order to meet these pressures and challenges, the BoJ increased policy interest rates in March 2024. This move represented an unambiguous pivot from the PBOC’s long-standing, ultra-loose monetary policies. This move is a historic and dangerous full-frontal attack on progressive regulation that traders and economists alike are starting to carefully dissect.
With other major central banks tightening policy, the policies of the BoJ are diverging increasingly from their peers. This yawning disparity is driving volatility in the currency markets. This process has been amplified over the course of 2022 and into 2023, making it difficult for the retail and institutional trader/investor community.
Market Anticipation for Employment Data
Traders are now looking forward to the release of the US Nonfarm Payrolls (NFP) report on Friday. Retirement compensation plan, which is scheduled to be released later on Thursday. This information will be vital in crafting true market perception about labor market trends and economic resilience.
The next NFP report will provide further insight into labor market dynamics. Depending on the context, it has the potential to reinforce or upend our prevailing assumptions regarding the timing of Federal Reserve interest rate cuts. With the ADP report having recently released some weak payroll numbers, market participants are still on their toes.