USD/JPY holds firm as Yen softens despite weaker US Dollar and Fed rate cut bets

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The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) on Wednesday despite a broadly weaker Greenback.

USD/JPY holds firm as the Yen stays soft despite a weaker US Dollar.
Traders ramp up expectations of a December rate cut following dovish signals from the Fed.
Repeated intervention warnings from Tokyo keep traders on alert.

The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) on Wednesday despite a broadly weaker Greenback. At the time of writing, USD/JPY is holding firm around 156.45, trimming most of Tuesday’s losses following a short-lived pullback driven by intervention chatter and softer US economic data.

The US Dollar is softer across the board as traders grow more confident that the Federal Reserve (Fed) could lower interest rates again in December. The dovish shift comes after several policymakers signalled openness to near-term easing amid rising concerns about labour-market softness.

The tone was reinforced by delayed US economic data showing weaker Retail Sales momentum and moderating Producer Price Index (PPI) readings, strengthening expectations of a policy adjustment. According to the CME FedWatch Tool, markets are now pricing in around an 80% chance of a 25 basis-point (bps) interest rate cut at the December 9-10 meeting.

However, second-tier US data released on Wednesday briefly lent support to the Greenback before it resumed its slide. The delayed September Durable Goods Orders rose 0.5%, beating the 0.3% forecast after a 3.0% increase in August, while orders excluding transportation climbed 0.6%, above both the 0.2% forecast and the 0.5% recorded in the previous month.

Orders excluding defense increased 0.1%, missing the 1.9% forecast, while Initial Jobless Claims came in at 216K, better than the 225K expected, with the prior figure revised to 222K from 220K.

In Japan, fiscal concerns and doubts that the Bank of Japan (BoJ) will hike rates in the near term continue to weigh on the Yen. That said, hawkish voices within the central bank are becoming more vocal amid excessive Yen weakness and its pass-through effects on inflation. A Reuters report on Wednesday suggested the BoJ is preparing markets for a possible interest rate hike as early as next month, according to unnamed sources.

Attention now turns to Thursday’s key Japan data slate, including Tokyo Consumer Price Index (CPI), Unemployment Rate and retail indicators, while US markets shut for Thanksgiving.

Meanwhile, intervention fears remain in focus after fresh verbal warnings from Tokyo. Japan’s Prime Minister Sanae Takaichi said the government is monitoring the foreign-exchange market closely and will take appropriate steps if needed, adding that authorities will judge whether currency moves reflect economic fundamentals.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.