USD/JPY analysis: BoJ disappoints as focus turns to intervention and US data - Forex Friday

• USD/JPY analysis: BoJ fails to halt yen’s decline, but there was hint of Japanese intervention near 170 handle
• Focus turns to key US data: Core PCE price index
• FOMC meeting, NFP report and ISM survey among next week’s highlights

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week’s report, we will discuss the Japanese yen, US dollar and look ahead to the next week.

USD/JPY analysis: BoJ fails to stem yen’s decline

The Bank of Japan’s latest policy decision has left more questions than answers, as the yen plunged to another multi-decade low against the US dollar, while accelerated its losses versus other major currencies too. Traders were looking for a firmer commitment from the BoJ towards additional policy tightening, and more to the point about any plans to stem the slumping yen. But they got nothing. Governor Ueda refused to say about the currency situation, and instead re-iterated that the BoJ could still raise rates again at some point.

Hint of Japanese intervention near 157.00

There was a hint of intervention, though, as the USD/JPY slumped 150 pips from a high of just under 157.00 at 08:00 London time, before bouncing back equally strongly. There wasn’t any official announcement or media reports, which did raise a few question marks over the move. Nonetheless, traders were happy to buy the dip at 155.00, which is now going to be the most important support level o watch. Perhaps, the intervention has started slowly, for now. Let’s see if they can cause a trend reversal.

Source: TradingView.com

Whether or not we will see more concrete steps from Japan remains to be seen. The “intervention level” has definitely shifted but if the yen’s slump accelerates then more steps could be taken by authorities. The Japanese government has repeatedly expressed concern regarding the ongoing devaluation of the yen, which continues to import inflation into Japan and deteriorates its terms of trade (making exports cheaper for foreign buyers but imports expensive).

Thanks to the BoJ’s lack of intent, traders are persisting in favoring higher-yielding foreign currencies over JPY. That is despite the Bank of Japan's first rate hike in March, which marked a 17-year gap. Though the Policy Rate has returned above zero for the first time in 8 years, it has failed to impede the yen's depreciation. Today’s BoJ meeting was again a failure insofar as halting the yen’s plunge is concerned.

USD/JPY analysis: All eyes on core PCE inflation

From the US, we have the Fed’s favoured gauge of inflation coming up later. Federal Reserve Chairman Jerome Powell cautioned last week that a robust US economy might justify keeping rates at their current levels for an extended period as necessary, emphasising that inflation had exhibited a lack of progress towards their objectives. While headline GDP came in weaker on Thursday, the GDP deflator raised inflation alarm bells, keeping the USD/JPY supported. Now if core PCE also exceeds expectations, this will mean elevated interest rates are likely for longer in the US.

It is expected to print another strong 0.3% month-over-month reading at 13:30 BST. Today’s other data highlights include Personal Spending and Income, and revised UoM surveys on Consumer Sentiment and Inflation Expectations.

So, unless we see a sharp downturn in US data, the USD/JPY could remain supported on the dips until something changes fundamentally.  But after a strong US CPI print and mostly stronger hard data, the Fed will definitely be hoping for a weaker print on the PCE measure of inflation.

But can the US dollar fall against other currencies?

Well, we have seen a bit of de-escalation in the Middle East conflict between Iran and Israel, while the improvement in Eurozone data has started to positively impact the single currency. The positive risk appetite as has been observed in the equities space, has helped to fuel a recovery in the more risk-sensitive currencies like the commodity dollars.

What’s more, most of the hawkish repricing of US interest rates are already priced in, which raises questions about the true influence of today’s PCE inflation data. Given that it tends to exhibit less volatility compared to headline CPI figures and market sentiment leaning towards minimal rate adjustments already, a bullish surprise might not wield as much impact as a downside surprise. A potential weaker reading could prompt those bullish on the dollar to find a convenient reason to exit their trades.

USD/JPY analysis: plenty of US macro highlights in coming week

The week ahead is actioned packed, with top tier data from the US.

FOMC policy decision

Wednesday, May 1

19:00 BST

Even before the hawkish repricing of US interest rates in the last few weeks, virtually no one was expecting a rate cut in May. So, the key focus in this meeting will be about how the Fed is assessing the direction of prices and employment. Previously Powell and co had dismissed the hotter inflation data in the first months of the year, but recently the rhetoric has changed, and we have seen a corresponding rally in US dollar. The market is now expecting a more hawkish-leaning FOMC meeting. But any inclination towards a rate cut before the end of the summer would now provide a dovish surprise.

US non-farm payrolls report

Friday, May 3

13:30 BST

Recent robust growth data and persistently high inflation figures have tempered expectations of rate cuts in 2024. But while hard data has been strong, we have seen soft survey-based figures, pointing to weakness. It is also possible that the extent of hawkish repricing may already be priced in. Therefore, any signs of weakness in US employment or wages data could alleviate concerns about the Fed's capacity to lower rates, leading to a sell-off in the dollar and fresh rally in gold.

US ISM services PMI

Friday, May 3

13:30 BST

The S&P Global PMI data released last week showed US business activity increased at a sharply slower pace April amid signs of weaker demand. Its services PMI showed the weakest reading in 5 months as orders fell in both the manufacturing and services sectors and companies responded by scaling back employment. If this is anything to go by then the closely watched ISM survey could disappoint expectations and potentially lead to another dovish repricing of Fed interest rates.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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