Yen Gains Capped by Improved Market Sentiment as Dollar Weakens on Soft U.S. Inflation Data

Most Asian currencies strengthened on Wednesday, while the dollar weakened after a soft U.S. producer inflation report raised hopes for a similar trend in consumer inflation, potentially leading to deeper interest rate cuts. Improved market sentiment limited gains for the Japanese yen, though it retained much of its recent rally. Asian currencies overall benefited from the weaker dollar and anticipation of rate cuts.

The USD/JPY pair stabilized after strong overnight gains, although improved risk appetite capped further yen strength. Japan's upcoming second-quarter GDP data, due on Thursday, is expected to influence the Bank of Japan's rate decisions.

Japanese Prime Minister Fumio Kishida announced his decision to step down in September, ending a three-year term affected by political scandals, and paving the way for a new premier to tackle rising prices. Kishida's resignation initiates a leadership contest within the ruling Liberal Democratic Party (LDP), which will also determine the country's next leader.

Kishida's declining public support, due to the LDP's ties to the controversial Unification Church and unrecorded political donations, along with dissatisfaction over stagnant wages amid rising living costs, contributed to his decision. His stepping down is seen as having limited immediate economic impact, with attention shifting to his successor.

Meanwhile, Japan's parliament will summon central bank Governor Kazuo Ueda next week to discuss the recent interest rate hike, the first in 15 years, which caused market turbulence. This hike, along with U.S. recession fears, led to significant market reactions, and Ueda's testimony will be closely watched.

Japan's real wages saw their first increase in over two years in June, supported by the fastest nominal pay growth in nearly three decades. However, household spending fell more than expected, complicating the Bank of Japan's plans to gradually raise interest rates. Rising inflation and weak consumer sentiment continue to pose challenges.

Manufacturers' confidence in Japan declined slightly in August, affected by weak demand from China, as revealed in the Reuters Tankan survey. The service sector also faced challenges due to persistent cost pressures, despite a return to growth in July driven by strong domestic demand.

Japan's wholesale inflation accelerated in July, with the corporate goods price index reaching a record high for the eighth consecutive month. The yen's weakness and rising commodity prices contributed to this inflationary trend.

The dollar remained weak on Wednesday after falling significantly overnight due to lower-than-expected U.S. producer price data, reinforcing expectations of Federal Reserve interest rate cuts this year, with U.S. 10-year Treasury yields dipping to 3.85% after a 5.5 basis point drop overnight.

The U.S. producer prices rose less than expected in July, with service costs dropping significantly, indicating waning inflation pressures. This trend supports the possibility of a rate cut next month, allowing the Federal Reserve to focus more on the labor market.

The soft producer price index (PPI) for July shifted market bets towards a potential 50 basis point rate cut in September, though a 25 basis point cut remains possible, according to CME Fedwatch. This PPI data increased hopes that the upcoming consumer price index (CPI) will also show easing inflation, encouraging the Fed to consider rate cuts amid concerns over a U.S. economic slowdown. Additionally, industrial production and retail sales data are expected later this week.

U.S. small-business confidence reached its highest level in nearly 2-1/2 years in July, suggesting that recession fears following last month's unemployment rate increase were overstated. The NFIB's Small Business Optimism Index rose to 93.7, the highest since February 2022. While inflation remains a concern, fewer businesses reported raising worker compensation and prices, indicating a positive inflation outlook. Increased inventory plans could boost GDP, complementing a recent rebound in the nonmanufacturing PMI.

U.S. Treasury yields are expected to rise modestly in the coming months, as markets may have overestimated the extent of potential Fed rate cuts this year, according to a Reuters poll. The 10-year Treasury yield hit a 14-month low of 3.67% in early August due to safe-haven demand amid recession fears. As a result, the USD/JPY pair is expected to remain within its current range, possibly moving slightly towards the upper end during this time.

Data for Technical Analysis (1H) CFD USD/JPY

Resistance : 147.43, 147.51, 147.63

Support : 147.19, 147.11, 146.99

1H Outlook    

Source: TradingView

Buy/Long 1 If the support at the price range 146.69 – 147.19 is touched, but the support at 147.19 cannot be broken, the TP may be set around 147.51 and the SL around 146.44, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 147.43 – 147.93, TP may be set around 148.16 and SL around 146.94, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 147.43 – 147.93 is touched, but the resistance at 147.43 cannot be broken, the TP may be set around 147.19 and the SL around 148.18, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 146.69 – 147.19, TP may be set around 146.55 and SL around 147.68, or up to the risk appetite.       

Pivot Points Aug 14, 2024 08:24AM GMT