The Japanese Yen (JPY) is trading with a moderate positive bias against the broadly weaker US Dollar (USD) during the first half of the European session, although it remains close to a one-year low, which it touched earlier on Monday. Concerns about further escalation of geopolitical tensions appear to be a major factor providing some support to the safe-haven Japanese yen. On the other hand, the US dollar is under pressure due to growing concerns about the independence of the US Federal Reserve and is moving away from its highest level since December 5, which it touched on Friday.
However, the Japanese yen’s upside remains limited amid reports that Japanese Prime Minister Sanae Takaishi may call an early general election. This comes on top of the growing rift between Japan and China and uncertainty over the potential timing of the next interest rate hike by the Bank of Japan (BoJ), which is preventing JPY bulls from placing aggressive bets. Hence, it would be wise to wait for a strong buying follow-through before confirming that the JPY has formed a near-term bottom and placing long positions for any real corrective decline in USD/JPY.
The Japanese yen rose as safe haven flows offset the Bank of Japan and political uncertainty
- US President Donald Trump told reporters on Sunday that he was considering a range of options, including possible military action, in response to the unrest in Iran. The latter threatened to target American military bases if Trump carried out his threats to intervene on behalf of the demonstrators.
- This comes on top of the intensifying Russia-Ukraine war and dampens investors’ appetite for riskier assets, providing some support to the safe-haven Japanese yen at the start of a new week. However, there are a number of factors preventing traders from placing strong bullish bets on the Japanese yen.
- Last week, China banned the export of dual-use goods, including some rare earth elements, to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and increases supply chain risks for Japanese manufacturers, which could be a headwind for the Japanese yen.
- Japanese Prime Minister Sanae Takaishi is considering holding early parliamentary elections in the first half of February, the Yomiuri newspaper reported on Friday. In addition, uncertainty about the timing of the next interest rate hike from the Bank of Japan could constrain the Japanese yen.
- On the other hand, the US dollar is attracting heavy selling amid growing concerns about the independence of the US Federal Reserve and moving away from its highest level since December 5, which it touched on Friday. This also contributes to the decline of the USD/JPY pair during the Asian session to the mid-157.00 areas.
- Federal Reserve Chairman Jerome Powell said the Justice Department is threatening to file a criminal indictment against him. Powell added that the threat of criminal charges is a result of the Fed, based on its best assessment of what will serve the public, not following the president’s preferences.
- On the economic data front, the US Bureau of Labor Statistics (BLS) reported on Friday that nonfarm payrolls rose by 50,000 in December, below expectations for a reading of 60,000 and 56,000 for November (revised from 64,000). However, the unemployment rate fell to 4.4% from 4.6% in November.
- This led to a shift in the likelihood of the Fed cutting interest rates at its next policy meeting on January 28, although it failed to convince US dollar bulls. However, the Fed is still expected to cut borrowing costs further this year, representing a significant contrast from the Bank of Japan’s hawkish bets.
- In fact, Bank of Japan Governor Kazuo Ueda confirmed last week that the central bank will continue raising interest rates if economic developments and prices move in line with expectations, leaving the door open for further policy tightening. This, in turn, limits the upside of the USD/JPY pair.
- Traders are now looking forward to the release of the latest US inflation figures – the Consumer Price Index (CPI) and Producer Price Index (PPI) on Tuesday and Wednesday respectively. This would affect the dynamics of the US dollar prices and provide new momentum to the USD/JPY pair.
USD/JPY may continue to find some support near the 157.50 area
The 200-period simple moving average on the 4-hour chart is rising at 156.14, with USD/JPY holding above it to maintain its bullish bias. As a slower trend measure, a rising simple moving average (SMA) confirms underlying demand. The Moving Average Convergence and Divergence (MACD) line stands above the signal line and above zero, while the histogram remains positive, indicating strong upward momentum. The Relative Strength Index (RSI) is at 75 (overbought), indicating extended conditions that could limit immediate gains.
The price remains supported by the rising 200-period simple moving average, and continued holding above this average should keep buyers in control. Positive alignment of MACD reinforces the bullish tone. With the RSI above 70, any decline could serve as a pause to clear overbought readings before the trend resumes. Failure to maintain the simple moving average rule will open the way for a corrective pullback.
(Technical analysis of this story was written with the help of an artificial intelligence tool)
Frequently asked questions about risk sentiment
In the world of financial terminology, the two widely used terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to take over the indicated period. In a “risk on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk off” market, investors begin to “play safe” because they are concerned about the future, and thus buy assets that are less risky and more guaranteed to generate a return, even if it is relatively modest.
Typically, during periods of “risk on”, stock markets rise, and most commodities – with the exception of gold – will also rise in value because they benefit from positive growth expectations. The currencies of countries exporting heavy goods are strengthening due to increased demand, and cryptocurrencies are rising. In a “risk off” market, bonds – especially major government bonds – rise, gold shines, and safe-haven currencies like the Japanese yen, Swiss franc and US dollar all benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and minor foreign currencies such as the Ruble (RUB) and South African Rand (ZAR) tend to appreciate in ‘risk’ markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodities tend to rise in price during periods of risk. This is because investors expect increased demand for raw materials in the future due to increased economic activity.
The major currencies that tend to rise during “risk off” periods are the US Dollar (USD), the Japanese Yen (JPY), and the Swiss Franc (CHF). The US dollar, because it is the world’s reserve currency, and because in times of crises investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. The reason for the yen is the increased demand for Japanese government bonds, because a high percentage of them are held by domestic investors who are unlikely to get rid of them – even in a crisis. The Swiss franc, because strict Swiss banking laws provide investors with enhanced capital protection.
