The USD/JPY pair has dipped below the critical support level of 140.00 during the Asian session, following the path set by the US Dollar Index (DXY). The DXY has experienced a correction, nearing 104.11 after being unable to sustain its recent two-month high of 104.31.
The correction in the USD/JPY pair appears to be more significant compared to the correction in the USD index, indicating that the Japanese Yen has also gained strength.
In the Asian session, S&P 500 futures continued their decline, reflecting an extension of the risk-aversion sentiment. US equities witnessed significant buying on Thursday, driven by a strong recovery in technology and financial stocks.
However, ongoing negotiations between White House officials and Republican leaders, which seem to be dragging on, have raised concerns and pushed the US economy closer to a potential default situation.
The fear of a default by the US economy is causing US Treasury yields to rise. Yields on 10-year US government bonds have surpassed 3.83%.
On Friday, the USD Index is expected to experience notable activity with the release of the US Durable Goods Orders data for April. The economic data is projected to show a contraction of 1.0% compared to the previously reported expansion of 3.2%.
Federal Reserve Policymakers Support No Rate Hike in June
Several economic indicators within the US economy are suggesting that the Federal Reserve (Fed) should pause its policy-tightening approach in the June monetary policy meeting.
Labor market conditions in the US have started to show signs of strain, the Consumer Price Index (CPI) is consistently decelerating, and businesses are anticipating a gloomy economic outlook. Reuters reported on Thursday that weekly emergency lending to banks from the Federal Reserve has declined to its lowest level since the banking sector faced challenges in March.
This indicates that companies are utilizing their retained earnings to meet their working capital requirements, avoiding higher interest rates or operating at reduced capacity.
It is worth noting that the minutes from the May Federal Open Market Committee (FOMC) meeting revealed that several Federal Reserve policymakers expressed uncertainty about further interest rate hikes due to tight credit conditions imposed by regional US banks.
Expectations for a pause in the rate-hiking cycle in June were reinforced by the dovish comments of Boston Federal Reserve Bank President Susan Collins, who stated that the Federal Reserve “may be at or near” the time to halt interest rate increases, as reported by Reuters.
She further added, “While inflation is still too high, there are some promising signs of moderation.”
Bank of Japan Contemplates Adjusting Yield Control Curve
Governor Kazuo Ueda of the Bank of Japan (BoJ) stated on Thursday that they would consider making adjustments to the Yield Curve Control (YCC) strategy if the balance between the policy’s benefits and costs were to shift.
The BoJ is considering the possibility of shortening the duration of bond yield targets from the current 10-year zone to a 5-year zone as part of the YCC.
Meanwhile, the Japanese Yen has gained strength following the release of decelerated Tokyo CPI data for May. Headline inflation has eased to 3.2% from the previous release of 3.5%, while market expectations were for an acceleration to 3.9%.
Core CPI, which excludes oil and food prices, also decreased to 3.9% compared to estimates of 4.3%, though it remained higher than the previous release of 3.8%.
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