The Japanese Yen remained under pressure on Wednesday, despite some divergent expectations between the Bank of Japan (BoJ) and the Federal Reserve (Fed). Traders are awaiting the release of the Tokyo CPI and US PCE Price Index on Friday for further direction. During the early European session, the Japanese Yen maintained a negative tone, driven by softer domestic data showing that the Service Producer Price Index (PPI) in Japan eased to a 3.0% Year-on-Year rate in February.
The positive sentiment in equity markets also diminished the appeal of the safe-haven JPY, while some US Dollar dip-buying behavior helped the USD/JPY pair hold on to intraday gains above the mid-150.00s. Markets are currently pricing in the possibility of the BoJ continuing to raise interest rates, given expectations of strong wage growth driving consumption and broader inflation trends. This contrasts with the Fed’s forecast of two 25-basis-point rate cuts in 2025.
The narrowing interest rate differential between Japan and the US could support the JPY and potentially limit the upside for the USD/JPY pair. The Bank of Japan indicated earlier on Wednesday that the Services Producer Price Index rose 3.0% YoY in February, slightly down from a 3.1% increase in January. BoJ Governor Kazuo Ueda reiterated that the central bank would continue to raise interest rates if economic and price developments align with forecasts.
Significant wage hikes over the past three years have led to expectations of further interest rate hikes by the Japanese central bank. In contrast, the Federal Reserve has signaled plans to cut interest rates by the end of this year, while also increasing its inflation projection.
Yen’s outlook amid central bank divergence
The increasing pessimism about the US economy has led to a sharp downturn in US Consumer Confidence, dropping for a fourth consecutive month in March. The Expectations Index fell to its lowest level in 12 years, underscoring concerns that the US might be heading into a recession. This prompted a modest US Dollar pullback from a nearly three-week high touched on Tuesday, which weighed heavily on the USD/JPY pair.
From a technical standpoint, this week’s breakout above the 200-period Simple Moving Average (SMA) on the 4-hour chart triggered bullish sentiments. Oscillators on the daily chart indicating positive traction further suggested that the path of least resistance for the USD/JPY pair could be to the upside. However, caution is advised as the pair faces resistance around the 151.00 mark.
A sustained move beyond 151.00 could lift spot prices towards the 152.00 level. On the downside, the 149.55 area may provide immediate support, with potential further decline towards the 148.75-148.70 support region. A breach of this level could tilt the bias in favor of bearish traders.
As traders anticipate the Tokyo CPI and US PCE Price Index on Friday, the Japanese Yen remains under pressure. Divergent central bank policies and mixed economic data point to a cautious outlook for the currency pair. It remains to be seen how these indices will impact market sentiment and the future direction of the USD/JPY pair.
