Dovish remarks from Christopher J Waller, a member of the Federal Reserve Board of Governors, regarding possible future US rate interest cuts have seen a weakening of the greenback.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to two per cent,” Waller told the American Enterprise Institute think tank in Washington on November 28.
Reuters reported that “Bond yields fell after the remarks, and traders moved to price rate cuts starting in May and dropping more than a full percentage point in 2024”.
And Naoto Arase, Head of the Fintech Department at PP Link Securities (PPLS), said that this in turn has seen a drop in the US dollar-Japanese yen (USD/JPY) currency pair.
The USD/JPY pair is continuing with its lacklustre performance, having at one point experienced a sharp drop to 147.32, he added.
Technical indicators, including the downward break of the Ichimoku cloud and the 90-day moving average line, along with the occurrence of a “bearish divergence” whereby trend and oscillator-based indicators separate, raise concerns over a potential deterioration in market conditions.
The USD/JPY exchange rate would be expected to decline should the US third quarter GDP data released on November 29, 2023 be below market expectations.
Further dovish remarks by the Cleveland Federal Reserve President Loretta J Mester, a slowdown in the economy or an inflation deceleration trend revealed in the Beige Book could also contribute to any fall.
A lowering of US interest rates, selling of the US dollar and large-scale triggering of stop-losses in long yen positions could amplify the decline.
Consequently Naoto Arase has changed his short-term USD/JPY outlook from bullish to bearish for the next week or so, while maintaining a bullish outlook for the medium to long-term.
In the short term, attention will be focused on whether the price can break below the lower limit of the Ichimoku cloud at 147.31 or the low of 147.15 recorded on November 21.
If these levels are broken, it could potentially breach the psychological levels of 147, 146, and 145 yen, and open up the possibility of a significant correction towards the low recorded on September 1, at around 144.44.
Caution is therefore necessary regarding the current downside risk in the USD/JPY exchange rate.The expected range for this week is 146.00-148.00.