The USD/JPY exchange rate analysis reveals a robust upward trend as the yen continues to weaken due to the interest rate differential between Japan and the United States. Simultaneously, economic data from Japan suggests a low likelihood of the Bank of Japan (BOJ) raising interest rates at its next policy meeting.
On Tuesday, the dollar extended its rally against the yen, with market attention centered on the significant interest rate gap between Japan and the US. Data released on Monday indicated that Japan downgraded its Q1 GDP figures, revealing a sharper economic contraction than initially reported. The economy shrank by 2.9% annually, compared to the previously reported 1.8% decline.
These revised figures complicate the prospects for rate hikes in Japan. A vulnerable economy could suffer further with increased borrowing costs. However, if the BOJ continues to delay rate hikes, the persistent rate gap between Japan and the US will continue to exert pressure on the yen.
Additionally, a surge in US Treasury yields weighed heavily on the yen. Yields soared in the previous session, boosting the dollar as markets factored in the possibility of a Trump victory in the upcoming election. This followed last week’s debate, where Trump appeared stronger than Biden. A Trump administration is expected to lead to higher inflation, which would, in turn, strengthen the dollar.
Investors are now eagerly awaiting Federal Reserve Chair Jerome Powell’s speech later today for further insights on the rate cut outlook. A cautious tone from Powell could further bolster the dollar.
