USD/JPY continues to fall after dovish Fed policy update

JPY: Testing support from uptrend that has been in place since start of 2023

The yen has continued to strengthen during the Asian trading session resulting in USD/JPY falling to an intra-day low of 148.51. The yen’s gains accelerated yesterday after the BoJ’s hawkish policy update (click here) at which the they indicated a greater willingness to keep raising rates to normalize monetary policy in Japan. In light of the BoJ’s policy update we are now pencilling in two further BoJ hikes in the current fiscal year and have brought forward our forecast for the next BoJ hike to later this year in either October or December. The hawkish repricing of the BoJ’s policy outlook has resulted in the 2-year JGB yield rising by around 9bps over the last couple of days to a high of 0.47%. As BoJ Governor Ueda stated in yesterday’s press conference, the current real policy rate adjusted for inflation remains “profoundly negative” and “far below” the uncertain levels of the neutral rate in Japan. It leaves room for rates to continue to adjust higher if Japan’s economy continues to evolve in line with the BoJ’s updated economic outlook. The ongoing adjustment higher in Japanese yields is providing more support for the yen. 

At the same time, yesterday’s policy update has strengthened the impression amongst market participants that the BoJ and government are now working more closely to support the yen. After it was confirmed yesterday that Japan intervened again to support the yen totalling JPY5.5 trillion in July, the BoJ placed more emphasis on inflationary impact of the yen in their updated guidance. The BoJ noted that “exchange rate developments, are compared to the past, more likely to affect prices”, and in the risks to prices section noted “how these factors will affect Japan’s prices requires due attention”. With the BoJ and government now more closely aligned it will help to provide more support for the yen.

After the BoJ’s hawkish policy update, the yen’s gains accelerated after USD/JPY broke below technical support from the 200-day moving average which came in at around 151.50. The pair has since fallen further overnight and tested support from the uptrend line joining the lows from in early 2023 and late 2023 which comes in at around 148.50. A decisive break below that level would bring an end to the up trend that has been in place since the start of 2023, and would signal a more significant reversal lower for USD/JPY heading into year-end towards the mid-to low 140.00’s. 

IS USD/JPY ON THE VERGE OF A DEEPER REVERSAL LOWER?

Source: Bloomberg, Macrobond & MUFG GMR

USD: Powell’s signals that Fed on course to cut rates in September

USD/JPY’s downward momentum has been encouraged as well overnight by a further adjustment lower for US yields following the latest FOMC meeting. The 2-year US Treasury yield has dropped sharply by around 8bps to low overnight of 4.25% as market participants have moved to price in even more rate cuts from the Fed in the coming years. The yield on the July 2025 Fed fund futures contract has fallen by around 9bps to 3.84% implying just over 150bps of cuts in the year ahead with the first cut more than fully priced in by September (28bps). US rate market participants are becoming increasingly confident that the Fed will lower their policy rate back closer to their estimate of neutral policy rate of just below 3.00% in response to slowing inflation.

Those expectations were reinforced yesterday by the stronger signal from the Fed that it is on course to begin cutting rates in September. In the press conference, Fed Chair Powell stated that “the question will be whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labour market. If that test is met, a reduction in our policy rate could be on the table as soon as the next policy meeting in September”. He also added that “the job is not done on inflation but nonetheless we can afford to begin to dial back the restriction in our policy rate”. The comments strongly signal that unless there are significant upside inflation surprises over the summer months, then the Fed will begin to cut rates in September.

At the same time, the Fed continued to display more concern over the risk of further weakness in the labour market. In the updated policy statement, the Fed added the line that “the economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate”. It replaced the line from the previous statement that “the Committee remains highly attentive to inflation risks”. The tweak to the policy statement highlights that inflation risks are no longer the Fed’s only policy focus when setting interest rates. The release of the latest nonfarm payrolls report for July on Friday will provide the next update on the health of the US labour market. With the US rate market having already moved to price in an aggressive pace of Fed rate cuts in the year ahead, further evidence of weakening labour demand and a rising unemployment rate will be required to encourage market participants to price in even faster and deeper cuts. The JOLTS report released this  week  continued to signal that there are downside risks to nonfarm farm employment growth. The JOLTS hiring rate for the private sector dropped by a further 0.2 point to 3.7%. The US dollar has proven relatively resilient to the Fed’s dovish policy update overnight perhaps indicating that a negative catalyst from the labour market will be required to trigger another leg lower

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	HCOB Eurozone Manufacturing PMI	Jul F	45.6	45.6	!!
EC	09:00	ECB Publishes Economic Bulletin				!!
NO	09:00	DNB/NIMA PMI Manufacturing	Jul	--	47.7	!!
UK	09:30	S&P Global UK Manufacturing PMI	Jul F	51.8	51.8	!!
EC	10:00	Unemployment Rate	Jun	6.4%	6.4%	!!
UK	12:00	Bank of England Bank Rate		5.00%	5.25%	!!!
US	12:30	Challenger Job Cuts YoY	Jul	--	19.8%	!!
US	13:30	Nonfarm Productivity	2Q P	1.8%	0.2%	!!
US	13:30	Unit Labor Costs	2Q P	1.7%	4.0%	!!!
US	13:30	Initial Jobless Claims		236k	235k	!!
US	14:45	S&P Global US Manufacturing PMI	Jul F	49.6	49.5	!!
US	15:00	Construction Spending MoM	Jun	0.2%	-0.1%	!!
US	15:00	ISM Manufacturing	Jul	48.8	48.5	!!

Source: Bloomberg