The USD/JPY exchange rate slipped for the second consecutive week and reached its lowest point since December last year. It dropped to a low of 140.80, down by about 13% from its highest point this year, meaning that it has moved into a correction.
The GBP/JPY, EUR/JPY pairs have also slipped to 185 and 156, down by over 10% from their highest levels this year. The AUD/JPY fell to 94.42, its lowest point since July 5.
Federal Reserve interest rate decision
The USD/JPY exchange rate has pulled back sharply as investors anticipate the upcoming Federal Reserve interest rate decision.
Recent economic numbers show that the economy was softening, meaning that the Fed will need to intervene with interest rate cuts.
Data released earlier this month showed that the unemployment rate remained stubbornly above 4% in August as the economy created 113k jobs.
There are signs that the number of nonfarm payrolls (NFP) were weaker than the reported ones. The Bureau of Labor Statistics (BLS) has revised the number of jobs added to the economy in the past few months.
In a recent report, the bureau revised downwards the number of jobs created in the twelve months to March by over 818,000.
Meanwhile, there are signs that the US inflation is falling and that it could drop to the Fed’s target of 2.0%. Data released last week showed that the headline Consumer Price Index (CPI) dropped from 2.9% in July to 2.5% in August, its lowest level in months.
There are signs that the country’s inflation is falling as energy prices have slipped. Brent, the global benchmark, dropped to $71 while the West Texas Intermediate (WTI) fell to $69. As a result, gasoline prices have moved downwards in the past few months.
Therefore, the expectation is that the Federal Reserve will cut interest rates by either 0.25% or 0.50% in this meeting. In a note, a Bloomberg analyst said:
“We think Fed Chair Jerome Powell supports a 50-basis point cut. However, the lack of a clear signal from New York Fed President John Williams before the pre-meeting blackout period makes us think Powell doesn’t have the full committee’s support.”
The Fed cut will come a week after the European Central Bank delivered its second interest rate cut of the year to avert the country’s slowdown.
Bank of Japan decision
The other big catalyst for the USD/JPY exchange rate will be the upcoming BoJ interest rate decision on Friday.
This decision will come a month after the bank roiled the market by delivering its second interest rate hike of the year.
Economists expect that the central bank will embrace a wait-and-see approach in this meeting even as inflation has remained stubbornly high.
The most recent data showed that the headline Consumer Price Index (CPI) remained at 2.8% in July, higher than the median estimate of 2.7%. It has risen from a low of 2.2% earlier this year.
There are also signs that the Japanese economy is slowing. The most recent economic data showed that the GDP expanded by 2.9% in the second quarter, missing the expected 3.1%.
A key concern for Japan is that the automobile industry is going through big changes, with China being a dominant player. Also, China is dominating other industries in Southeast Asia and Japan used to be a big player.
Japanese yen carry trade unwind
The BoJ and Fed decisions will be notable because of the carry trade that has existed for many years. A carry trade is a situation where investors borrow money in low-interest-rate countries and invest in higher-rate countries.
In the past, it has been highly profitable to borrow in Japan, which had negative interest rates, to invest in the US. Now, with the Fed cutting rates, and the BoJ relatively hawkish, the spread has narrowed, making the carry trade unattractive.
Therefore, the main actions of the Fed and BoJ will likely not have a big impact on the USD/JPY pair. Instead, the pair will react to the statements by Powell and BoJ’s Kazuo Uoda, who will hint on the next actions.
USD/JPY technical analysis
USD/JPY chart by TradingView
The daily chart shows that the USD to JPY exchange rate peaked at over 160 earlier this year and then suffered a harsh reversal as the BoJ started to hike rates.
Most recently, the pair has formed a death cross pattern as the 200-day and 50-day Exponential Moving Averages (EMA) crossed each other. A death cross is one of the most bearish patterns in the market.
The pair has also dropped below the key support level at 141.67, its lowest level in August. Therefore, the pair will likely continue falling as sellers target the key support level at 137.16, its lowest swing since July last year.
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