Japanese Yen extends gains as traders expect BoJ to raise interest rates

• The Japanese Yen appreciates due to the hawkish sentiment surrounding the BoJ’s policy stance ahead of next week's meeting.
• Japan's Manufacturing PMI fell to 49.2 in July from a 50.0 reading; Services PMI surged to 53.9 from the prior 49.4.
• CME Group’s FedWatch Tool indicates an increase to 93.6% odds of a 25-basis point rate cut in September.

The Japanese Yen (JPY) extends its gains for the third consecutive session on Wednesday, likely due to a return of risk-off flows. The Bank of Japan (BoJ) is anticipated to raise interest rates at next week’s policy meeting, prompting short-sellers to exit their positions and providing support to the JPY.

A senior official in the ruling party, Toshimitsu Motegi urged the Bank of Japan (BoJ) to more clearly communicate its plan to normalize monetary policy through gradual interest rate hikes, according to Reuters. Prime Minister Fumio Kishida added that normalizing the central bank’s monetary policy would support Japan's transition to a growth-driven economy.

The US Dollar (USD) faces challenges due to rising bets on a Federal Reserve (Fed) rate cut in September, which put pressure on the USD/JPY pair. According to CME Group’s FedWatch Tool, markets now indicate a 93.6% probability of a 25-basis point rate cut at the September Fed meeting, up from 88.5% a day earlier.

Traders await the data release of the US Purchasing Managers Index (PMI) data on Wednesday and the Gross Domestic Product (GDP) Annualized (Q2) figures on Thursday. These figures are expected to provide new insights into the economic conditions of the United States.

Daily Digest Market Movers: Japanese Yen improves due to the return of the risk-off flows

• The Jibun Bank Japan Manufacturing PMI unexpectedly fell to 49.2 in July from 50.0 in the previous month, missing market forecasts of 50.5 and indicating the first decline in factory activity since April, according to preliminary estimates. In contrast, the Services PMI surged to 53.9 in July from a final reading of 49.4 in the prior month. This marks the sixth increase in the service sector this year and the steepest pace since April.
• Media reports say that Vice President Kamala Harris has just passed 1,976 Democratic delegates to secure the party's presidential nomination. Harris is now the Democratic Party’s Presumptive Nominee for November’s Presidential Election.
• Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail. Williams noted, "My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic," according to Bloomberg.
• Japan's National Consumer Price Index (CPI) for June held steady at 2.8%, matching the previous month's figure and remaining at the highest level since February. Meanwhile, Core CPI inflation rose to 2.6%, slightly above the previous reading of 2.5% but just below the consensus estimate of 2.7%.
• JP Morgan has anticipated no rate hike from the Bank of Japan (BoJ) in July or at any point in 2024. A July rate increase is not their base case, and they do not expect any hikes for the remainder of 2024. They believe it is too early to adopt a bullish stance on the Yen.
• Kazushige Kamiyama, a senior Bank of Japan (BoJ) official and the central bank’s Osaka branch manager, said on Thursday that the BoJ wants to maintain an accommodative monetary environment as much as possible, per Jiji News Agency.
• Last week, BoJ data suggested that authorities may have intervened by purchasing nearly ¥6 trillion on July 11-12. Additionally, data revealed that Japan sold approximately $22 billion in US Treasuries in May to raise dollars, bolstering its reserves for potential foreign exchange market operations, according to Reuters.

Technical Analysis: USD/JPY falls toward 155.00

USD/JPY trades around 155.20 on Wednesday. The daily chart analysis shows that the USD/JPY pair is within an ascending channel, indicating a dovish bias. Additionally, the 14-day Relative Strength Index (RSI) is below 50, reinforcing a bearish outlook. If the RSI breaks below the 30 level, it could indicate an oversold situation and a potential short-term rebound.

The USD/JPY pair may find significant support near June's low of 154.55, followed by the lower boundary of the ascending channel. A decline below this level could lead to a further drop toward May's low of 151.86.

On the upside, immediate resistance is at the nine-day EMA of 157.07, which aligns with the upper boundary of the ascending channel. A breakout above this level could push the USD/JPY pair toward the pullback resistance around the psychological level of 162.00.

USD/JPY: Daily Chart