Japanese Yen hangs near daily low against USD, US election concerns help limit losses

• The Japanese Yen weakens slightly on Tuesday, though the downside remains cushioned.
• The BoJ’s hawkish hints, along with a weaker risk tone, offer support to the safe-haven JPY.
• The US election-related uncertainty and Fed rate cut bets keep the USD bulls on the sidelines.

The Japanese Yen (JPY) moves further away from a one-week low touched against its American counterpart on Monday amid expectations that Japan's political landscape could make it difficult for the Bank of Japan (BoJ) to hike interest rates further. That said, BoJ Governor Kazuo Ueda's comments during the post-meeting press conference last week keep a potential interest rate hike at the next BoJ policy meeting in December on the table. Apart from this, the market nervousness ahead of the tight US presidential election and geopolitical risks offer some support to the safe-haven JPY. 

Furthermore, the narrowing of the US-Japan rate differential helps limit the JPY losses, which, along with a subdued US Dollar (USD) price action,  fails to assist the USD/JPY pair to capitalize on its move beyond mid-152.00s. Investors now seem convinced that the Federal Reserve (Fed) will lower interest rates later this week. Adding to this, the "Trump trade" unwinding leads to a further decline in the US Treasury bond yields and keeps the USD bulls on the defensive. This, in turn, warrants some caution before positioning for any meaningful intraday appreciating move for the currency pair. 

Daily Digest Market Movers: Japanese Yen bears seem reluctant amid bets for more BoJ rate hikes, US election uncertainty

• A rare political turmoil after a snap election in Japan cast doubts over the Bank of Japan's ability to hike rates further and exerts some downward pressure on the Japanese Yen, which, in turn, lifts the USD/JPY pair back above mid-152.00s.
• Meanwhile, BoJ Kazuo Ueda left the door open for a December rate hike and said last week that the central bank remains committed to normalizing its monetary policy by gradually hiking interest rates if economic data align with forecasts
• Friday's mixed US employment details for October, which showed that Nonfarm Payrolls registered the smallest gain since December 2020, reaffirmed market bets for a 25 basis point interest rate cut by the Federal Reserve later this week. 
• The chances of Donald Trump winning the 2024 US presidential election have deteriorated noticeably and the Democratic Vice President Kamala Harris has a slight lead in some polls, though overall they show a tight race to the White House. 
• This prompts traders to unwind "Trump trades" and leads to a further decline in US Treasury bond yields, narrowing the US-Japan rate differential and offering some support to the Japanese Yen amid a generally weaker tone around the equity markets.
• Declining US bond yields fail to assist the US Dollar to capitalize on the overnight bounce from a two-week low, which contributes to capping the USD/JPY pair and warrants some caution before positioning for a further intraday appreciating move. 

Technical Outlook: USD/JPY could appreciate further while above the 100-day SMA resistance breakpoint near the 150.30 area

From a technical perspective, the 152.00 round figure now seems to protect the immediate downside ahead of the overnight swing low, around the 151.55-151.50 region. Some follow-through selling could drag the USD/JPY pair further below the 151.00 mark, toward testing the 100-day Simple Moving Average (SMA) resistance breakpoint, currently pegged near the 150.30 region. This is followed by the 150.00 psychological mark, which if broken decisively will set the stage for deeper losses. 

On the flip side, momentum beyond the overnight swing high, around the 152.55-152.60 area, could extend further toward the 153.00 mark. The subsequent move up has the potential to lift the USD/JPY pair to the 153.35-153.40 supply zone en route to the 153.85-153.90 region, or a three-month peak touched last week. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders. Given that oscillators on the daily chart are holding in the positive territory, spot prices might then climb to the next relevant hurdle near the 154.60-154.70 area before aiming to reclaim the 155.00 psychological mark. 

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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