The Japanese Yen experienced a sharp retreat after reaching a five-week high against the US Dollar during the Asian trading session on Tuesday. The USD/JPY pair rallied significantly, gaining over 100 pips from levels below the critical psychological mark of 155.00 in the past hour. This development sets the stage for potential further gains, with the possibility of the USD/JPY pair retesting its multi-month peak around the 159.00 neighborhood, a level last touched on January 10.
The Japanese Yen, recognized as one of the most traded currencies worldwide, has been significantly impacted by the Bank of Japan's (BoJ) ultra-loose monetary policy, which spanned from 2013 to 2024. This policy stance led to a depreciation of the Yen against its main currency peers due to an increasing policy divergence with other major central banks. The BoJ's commitment to maintaining this policy has resulted in a wider policy gap, particularly with the US Federal Reserve, which has adopted a more aggressive monetary stance.
Despite these challenges, the Japanese Yen remains a popular safe-haven investment, offering security for investors during times of global economic uncertainty. However, recent developments have influenced its trading dynamics. The announcement by former US President Donald Trump regarding the imposition of 25% tariffs on Mexico and Canada spurred risk aversion across global markets. This move negatively impacted higher-yielding currencies like the Australian Dollar and contributed to the Yen's depreciation.
The narrowing of the rate differential between the United States and Japan is currently preventing traders from making aggressive bearish bets against the Yen. This narrowing has kept a lid on the intraday positive momentum of the USD/JPY pair. The BoJ's decision in 2024 to gradually phase out its ultra-loose policy, along with interest-rate cuts by other major central banks, is contributing to this narrowing differential.
The widening gap between 10-year US and Japanese government bonds has favored the US Dollar against the Japanese Yen, influencing recent market movements. Additionally, hawkish comments from BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino have raised expectations for an imminent rate hike by Japan's central bank. These comments, coupled with broadening inflationary pressures in Japan, underscore the potential for a shift in monetary policy.
Despite the volatility, the USD/JPY pair continues to exhibit resilience below the 155.00 mark. It has successfully defended a crucial support level representing the lower boundary of a multi-month-old ascending channel. This technical support suggests that further upward momentum may be possible if current conditions persist.