Japanese Yen trades with negative bias against USD ahead of Trump’s reciprocal tariffs
The Japanese Yen (JPY) struggles to capitalize on the previous day's modest gains against its American counterpart and attracts fresh sellers during the Asian session on Wednesday. The USD/JPY pair, however, remains confined in a range held since the beginning of this week as traders await a fresh catalyst before positioning for the next leg of a directional move. Hence, the focus will remain glued to US President Donald Trump's reciprocal tariffs announcement later today.
In the meantime, speculations that a tariff-driven economic slowdown might force the Bank of Japan (BoJ) to keep the policy steady for the time being undermine the JPY. Investors, however, seem convinced that the BoJ will continue raising interest rates amid signs of broadening inflation in Japan. This marks a big divergence in comparison to the growing acceptance that the Federal Reserve (Fed) will resume its rate-cutting cycle in June and should support the lower-yielding JPY.
Japanese Yen bulls remain on the sidelines amid market anxiety over Trump’s reciprocal tariffs
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.
Source: Fxstreet
