Fundamental Analysis

USD/JPY Crosses 140.20 Mark in Surge While Investors Anticipate BoJ Rate Decision

USD/JPY Crosses 140.20 Mark in Surge While Investors Anticipate BoJ Rate Decision

During the European session on Friday, the USD/JPY pair demonstrated strong upward momentum, crossing the 140.20 mark. This surge in the exchange rate can be attributed to the diverging monetary policies pursued by the Bank of Japan (BoJ) and the Federal Reserve (Fed). The BoJ has maintained an ultra-loose monetary policy, while the Fed has resumed its tightening policy, leading to the weakening of the Japanese Yen against major currencies.

Positive signs for the US economy were evident in the latest weekly data released by the US Department of Labour (DOL). Initial Jobless claims for the week ending July 15 totaled 228,000, surpassing market expectations of 242,000 and marking a decline from the previous figure of 237,000. This reading represented the lowest level since mid-May. Furthermore, the Philadelphia Federal Reserve Manufacturing Survey showed a reading of -13, better than the consensus of -10. However, Existing Sales for June were disappointing, revealing a contraction of 3.3% MoM after a marginal 0.2% gain in the previous reading.

Investors are eagerly awaiting the upcoming Federal Reserve meeting, with expectations of a 25-basis-point interest rate hike. Additionally, the possibility of another rate hike before the year’s end has gained traction following the release of the latest economic report. As a result, the US Dollar is displaying broad-based strength in the forex market.

Meanwhile, the Japanese Yen faces a different economic scenario. Surprisingly, Japan’s trade balance has turned into a surplus for the first time since July 2021, offering some relief for the country’s economic recovery. The Japanese trade surplus reached ¥43 billion, surpassing market consensus, which had predicted a ¥46.7 billion deficit. Moreover, June’s National Consumer Price Index (CPI) rose from 3.2% to 3.3% YoY, slightly below the anticipated 3.5% figure.

Despite these positive economic indicators, BoJ Governor Kazuo Ueda is expected to maintain the current easy-money policy. While market participants had anticipated adjustments to the ultra-loose monetary policy and Yield Curve Control (YCC) policy, Governor Ueda’s likely dovish stance has led to a widening divergence between the monetary policies of the BoJ and the Fed. Consequently, the Japanese Yen has weakened against other major currencies.

Looking ahead, investors are closely monitoring the Bank of Japan’s interest rate decision, scheduled for the next week. Governor Kazuo Ueda is expected to maintain a dovish policy stance in an effort to sustain inflation at around 2%. The outcome of this decision will significantly influence the future trajectory of the USD/JPY pair and could potentially result in further volatility in the forex market.