The USD/JPY currency pair has been very volatile during that time period. It has dropped lower into the mid-143.00s after a surprisingly strong Tokyo Consumer Price Index (CPI) report. This drop marks a continuation of the steep decline from a two-week high. For the second day in a row, sellers have returned with a vengeance, sparked by higher-for-longer concerns and other deepening bearish news.
On Tuesday, the Tokyo CPI numbers came in hot on a year-over-year basis, shocking even the most hawkish of analysts. This announcement increased market expectations that the Bank of Japan (BoJ) would raise interest rates in the near term. The hawkish CPI surprise has resulted in considerable upward pressure on the Japanese yen. People tend to see it as a gold standard, a safe haven, in times of economic uncertainty. Against the JPY, the JPY has therefore appreciated considerably, in an environment where demand for the US dollar remains lackluster.
Beyond the surprisingly strong CPI figures, a perfect storm of factors combined to add significant downward pressure on USD/JPY. Market participants reacted to the growing consensus regarding potential policy shifts by the Bank of Japan, which has maintained a loose monetary policy for an extended period. The expectation of a tightening in monetary policy, after the very strong inflation data, has attracted even more attention to the yen.
The USD/JPY pair continues to be under tremendous pressure. Either way traders are nervously watching both US and Japanese economies for more signals going forward. Prominent analysts think the yen is poised to gain strength. If so, the USD/JPY exchange rate could decrease significantly more.
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The recent volatility in the currency pair is a microcosm of global risk aversion driven by domestic economic fundamentals and rising geopolitical risk. With the yen catching a bid, investors are busy taking profit and/or adjusting their positions for what is widely expected to be the commencement of BoJ rate hikes. Future conversations surrounding the direction of monetary policy will continue to impact bullish/bearish USD/JPY trading. Look for these discussions to shape the market in the days ahead.
Even with this upward pressure on USD/JPY, some experts don’t feel comfortable making outright bets. They note that current trends are going in the yen’s favor. External actors, as with so many things, such as US economic performance and global market conditions might rapidly overturn this dynamic.