USD/JPY Takes a Breather Amid Disappointing US Data and Anticipation of the Fed’s Policy Decision

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The USD/JPY pair took a breather on Tuesday, shedding 0.7% to close at 136.55, erasing most of the gains made in the previous session. The decline came on the back of disappointing macroeconomic data from the US, which weighed on US bond rates, sending them tumbling across the Treasury curve.

The 2-year note fell by 20 basis points to 3.94%, while the 10-year security dropped by almost 15 basis points to 3.43%, nearing their late April lows. This fall in yields was attributed to the softening of the US jobs market, as the March JOLTS report showed a significant decline in employment openings to 9.59 million, below expectations of 9.64 million and the lowest level since April 2021. The data underscores the challenges the job market is facing and the difficulties of overly restrictive monetary policy.

The Federal Reserve is closely watching the softening of the labor market, which could translate into lower wage growth in the coming months. If this happens, it may relieve pressure on inflation and the need to keep interest rates high for longer, benefiting the Japanese yen.

All Eyes on FOMC Policy Decision for Clues to USD/JPY Price Path

All eyes are now on the Fed’s policy decision, which is expected to be delivered on Wednesday. The Federal Open Market Committee (FOMC) is anticipated to lift interest rates by 25 basis points to 5.00–5.25%. However, uncertainty arises over what the forward guidance will look like.

There is no general consensus on the Fed’s messaging, but it is likely that the Fed will conditionally suspend its hiking campaign given the recent turmoil in the banking sector. The policymakers may opt for a more neutral message to keep their options open for further tightening in the future.

Anything less than a clear “pause” signal would be supportive for USD/JPY. However, a dovish outlook could be a strong tailwind for the Japanese yen. Hence, traders are advised to watch the Fed’s message closely to determine the pair’s future direction.

Overall, the USD/JPY pair remains in a precarious position, as it is caught between the Fed’s anticipated policy decision and the concerns of a softening US jobs market. As a result, investors are advised to tread with caution and keep a close watch on market developments.