Japanese yen (JPY) gave back its intraday gains versus the US dollar (USD) on Tuesday, taking the USD/JPY pair to a fresh daily high around 144.30. The yen’s safe-haven appeal has been undercut by stimulus measures in the wake of Japan’s recent earthquake and falling inflation rates that confirm the Bank of Japan will maintain its ultra-accommodative monetary policy.
At the same time, the USD is finding its footing thanks to a further rise in US Treasury bond yields. With Fed rate cut bets easing, USD buying interest has emerged. The USD/JPY has now recovered around 90 pips from session lows, climbing back above its technically important 200-day moving average.
Earthquake to Delay BOJ Policy Normalization
The devastating 7.0 earthquake that struck Japan on January 1st is seen delaying the Bank of Japan from moving away from its entrenched quantitative easing program in the near-term. The government has already proposed an extra budget to fund earthquake relief and reconstruction efforts.
With Japan now likely to increase fiscal spending and the economic impact of earthquake damage, the BOJ has scope to lag behind other central banks in policy normalization. This has reduced the yen’s traditional haven demand.
Meanwhile in the US, upside surprises in last Friday’s monthly jobs report coupled with increased odds of a soft landing for the economy has eased market expectations for Fed rate cuts starting soon. US Treasury yields have rebounded as a result, reigniting USD demand.
The buck has shown resilience even as 5-year US inflation expectations hit their lowest level since October 2021 on Tuesday. This reflects declining consumer price pressures ahead of Thursday’s CPI figures. Further evidence of peaking inflation could hamper additional near-term USD strength.
Yen Selloff Sees Range Highs Challenged
With Japan’s ultra-easy monetary policy seen entrenched for longer, the yen remains vulnerable to further declines versus the USD. The USD/JPY is now testing upside resistance around the 144.50 level after its latest upward extension.
If range highs are surpassed convincingly, upside momentum could accelerate for the pair. However lingering uncertainty over the Fed’s rate cut path may prompt profit-taking on stretched USD/JPY longs. Key support lies around the 143.00 figure ahead of the 200-day SMA at 142.60.