The Japanese Yen drifts lower amid concerns that Trump’s tariffs would affect Japan’s industries.
The divergent BoJ-Fed policy expectations should limit deeper losses for the lower-yielding JPY.
Traders might also refrain from placing aggressive bets ahead of Trump’s tariffs announcement.
The Japanese Yen (JPY) sticks to its negative bias heading into the European session on Wednesday amid speculations that a tariff-driven economic slowdown might force the Bank of Japan (BoJ) to keep the policy steady for the time being. Apart from this, a generally positive tone around the Asian equity markets turns out to be another factor weighing on the safe-haven JPY. This, along with a modest US Dollar (USD) uptick, acts as a tailwind for the USD/JPY pair.
However, the growing acceptance that the Bank of Japan (BoJ) will continue raising interest rates amid broadening inflation in Japan helps limit JPY losses. In contrast, bets that the Federal Reserve (Fed) will resume its rate-cutting cycle soon hold back the USD bulls from placing aggressive bets. Furthermore, the divergent BoJ-Fed expectations lend support to the lower-yielding JPY and fail to assist the USD/JPY pair to climb further beyond the src50.00 psychological mark.
Japanese Yen bears seem non-committed amid BoJ rate hike bets
Asian equity markets tracked the overnight gains on Wall Street ahead of the impending reciprocal tariffs announcement from US President Donald Trump on Wednesday, undermining the safe-haven Japanese Yen.
Meanwhile, Trump dashed hopes that the levies would be limited to a smaller group of countries with the biggest trade imbalances and said on Sunday that so-called reciprocal tariffs would essentially include all nations.
Furthermore, worries that the new levies would have a far-reaching impact on Japan’s key industries forced investors to scale back their expectations that the Bank of Japan would raise policy rate at a faster pace.
However, the incoming macro data, including strong consumer inflation figures from Tokyo released last Friday, keeps the door open for further interest rate hikes by the BoJ and helps limit deeper losses for the JPY.
The Federal Reserve, on the other hand, remains in an uncomfortable position on the back of rising prices and slowing business activity, which implies that the economy could be heading toward stagflation.
The concerns were further fueled by data showing that the manufacturing sector contracted for the first time in three months and inflation at the factory gate jumped to the highest level in nearly three years.
In fact, the ISM Manufacturing Purchasing Managers Index (PMI) fell to 49 from 50.3 in February. Moreover, the Employment Index highlights a decrease in the sector’s payrolls at an accelerating pace.
Adding to this, the Job Openings and Labor Turnover Survey (JOLTS) revealed that the number of job openings on the last business day of February stood at 7.56 million, down from 7.76 million in January.
The markets are currently pricing in the possibility that the Fed would lower borrowing costs by 80 basis points by the end of this year, which fails to assist the US Dollar in attracting any meaningful buyers.
Meanwhile, the divergent BoJ-Fed expectations could further narrow the rate differential between Japan and the US. This, in turn, should limit losses for the lower-yielding JPY and cap the USD/JPY pair.
Traders now look forward to Wednesday’s US economic docket – featuring the ADP report on private-sector employment and Factory Orders – for some impetus ahead of Trump’s tariffs announcement.
USD/JPY struggles to move back above src50.0; not out of the woods yet
From a technical perspective, the USD/JPY pair has been showing resilience below the src00-period Simple Moving Average (SMA) since the beginning of this week. The subsequent move up could favor bullish traders, though neutral oscillators warrant some caution. Moreover, the recent breakdown below a multi-week-old ascending channel makes it prudent to wait for strong follow-through buying before positioning for any meaningful gains.
In the meantime, the weekly high, around the src50.25 area, could act as an immediate hurdle. A sustained strength above could lift the USD/JPY pair beyond the src50.75-src50.80 hurdle, towards the src5src.00 mark. This is followed by the March monthly swing high, around the src5src.30 region and a technically significant 200-day SMA, currently pegged near the src5src.60 zone, above which spot prices could reclaim the src52.00 mark and climb further to the src52.45-src52.50 region en route to the src00-day SMA, around the src53.00 round figure.
On the flip side, the src00-period SMA on the 4-hour chart, currently around the src49.30-src49.25 area, followed by the src49.00 mark and the src48.70 region, or the weekly swing low, could offer support to the USD/JPY pair. A convincing break below, however, will be seen as a fresh trigger for bearish traders and make spot prices vulnerable to resume a well-established downtrend witnessed over the past three months or so.
Tariffs FAQs
Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.
Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.
There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.
During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.
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