Yesterday, the Fed decided not to change interest rates at 5.50%, which was expected, but provided cautious estimates that differed from the hawkish expectations. Despite acknowledging the recent slowdown in economic growth, the bank also signaled its intention to shorten the monetary expansion period (QT) further than expected for government bonds, starting in June. This comes in conjunction with the position of the bank’s president, Jerome Powell, who has repeatedly emphasized There is no need to raise interest rates again without strong evidence.
The decision of the Federal Reserve (the central bank of the United States) is among the major economic events that affect global financial markets. One of those important markets is the foreign exchange market, where these decisions have a significant impact on the values of international currencies. In this article, we will take a deep look at how the Federal Reserve’s decisions affect the value of the Japanese yen.
At the end of the US trading session yesterday, May 1, the USDJPY pair experienced a sharp decline, as selling accelerated and its value fell by nearly 500 pips in just half an hour. It seems that this decline was the result of obvious intervention, however, the pair quickly regained its balance.
However, US economic data continues to show strength and remains the primary factor determining long-term trends, so the Fed’s decisions are only temporary noise. If the strong data continues, especially regarding inflation rates, the pair is likely to see new highs.
Technically, the USDJPY pair shows stability around the 155.1 level after the Japanese intervention, and it is possible to identify a strong support area around the 152.99 level, where several key levels and trend lines intersect.
The Japanese yen rose after the US Federal Reserve policy update
The Japanese yen saw a sharp rise in value amid a broad sell-off in the US dollar, following the Federal Reserve’s policy update on May 1. This rise has raised expectations that the authorities will intervene to support the local currency.
Within two hours of the Fed announcing its decision, the yen rose significantly, with the dollar-yen rate falling from around 157.57 to 152.99, raising traders’ doubts about Japanese authorities intervening again.
Although Japanese Deputy Finance Minister Kanda refrained from commenting on the authorities’ involvement in the market when asked, this appears to be the second attempt this week to support the value of the yen, as the first attempt was made on Monday after the yen fell to 160 against the dollar.
However, the value of the yen weakened again today, continuing to fall by more than 10% against the dollar this year, as a result of waning optimistic expectations and diminished bets on interest rate cuts by the Federal Reserve and the Bank of Japan.
The US dollar lost strength against all major currencies, and fell significantly against the Japanese yen, with the USDJPY rate falling by more than 2%.
The Federal Reserve was the reason behind the dollar’s decline, as the committee decided to keep interest rates unchanged as was widely expected, and although officials expressed concern about the lack of progress towards the inflation target, the future direction of policy remained unchanged.
At the press conference, when asked about the possibility of raising interest rates, Chairman Powell clearly stated that this is unlikely to happen at the present time, and indicated that monetary policy is prepared to deal with the various shifts that the economy may witness.
The impact of the Fed’s policy decision on the Euro/Jenn pair and expectations of an interest rate cut
Following the Fed’s policy decision, the EUR/JPY pair saw a notable rise, driven by positive market sentiment. Recent inflation data from the Eurozone has reinforced expectations of an interest rate cut by the European Central Bank in June, which has a positive impact on the euro’s performance against the yen. On the Japanese side, the Japanese yen initially rose due to potential intervention from the Japanese government, but later fell due to estimates of the Bank of Japan minutes from the March meeting.
Positive market sentiment on Thursday was reflected in support for the EUR/JPY pair, as it reached the 166.10 level during the European session. Notably, this improvement can be partly attributed to Federal Reserve Chairman Jerome Powell’s comments on Wednesday, in which he denied the possibility of further interest rate increases.
The ECB is expected to remain dovish, as recent inflation data showed Eurozone inflation stabilizing in April, which could lead to a rate cut in June. This in turn may raise concerns about demand for the euro, weakening the EUR/JPY.
On the other hand, the Eurozone Manufacturing Purchasing Managers’ Index recorded a reading indicating a slight acceleration in the pace of decline in the manufacturing sector, while the Consumer Confidence Index declined, reflecting weak sentiment among households. In Japan, despite expectations of possible government intervention, the Japanese yen later fell due to the Bank of Japan’s estimates.
Given the current economic situation, it is expected that the economy’s reaction to an increase in the short-term interest rate will be limited, while determining long-term interest rates may be the prerogative of market forces, emphasizing the necessity of reducing bond purchases and the size of their holdings by a bank. Japan.
NFP and ISM Services PMI: Growth and Inflation Outlook
What is the next motivating factor? Today, the only notable release is the recent US unemployment claims numbers. However, no major change is expected in the market, as we see usual stability in initial claims levels, hovering at cycle lows, and continuing claims hovering around the 1,800K level. So, what to watch next is the US monthly NFP jobs report and ISM services PMI tomorrow.
Regarding the NFP monthly jobs report, the focus should be on average hourly wages, as lower wage growth in the labor market may be considered positive for growth and inflation. On the other hand, a strong report in this aspect may cause market tension, and the market will consider it hawkish. As for the Services PMI, the focus should be on prices and employment components. We had a strong hawkish reaction last time when the price index fell to its lowest level in 4 years. So; If the index declines or stabilizes at current levels, it could be seen as good news for inflation, and even if the number exceeds expectations, it could boost risk sentiment.
Combined with the announcement that the pace of balance sheet drawdown has slowed more than expected, it could spell disappointment for those anticipating hawkishness, opening the door to the market’s belief that the Fed is still leaning toward lower interest rates later this year. In fact, Treasury yields have also fallen, while according to Fed funds futures, investors expect cuts of 35 basis points from around 30 basis points before the meeting.
