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USD/JPY Falls more than 1% following Powell’s Testimony

Key Takeaways:

  • The USD/JPY pair experienced a sharp decline of over 1% on Thursday, May 7, 2024, following Federal Reserve Chair Jerome Powell’s testimony to Congress.
  • Powell’s testimony had dovish undertones, suggesting a potential pause in rate hikes and eventual easing of monetary policy later in the year if the economy evolves as expected.

May 7, 2024 – The Japanese yen experienced a significant appreciation against the US dollar on Thursday, with the USD/JPY pair dropping more than 1% following the testimony by Federal Reserve Chair Jerome Powell. The currency pair’s decline came amidst contrasting monetary policy stances between the Bank of Japan (BOJ) and the Federal Reserve.

The Federal Reserve’s Stance

During his semiannual Monetary Policy Report to Congress on May 6th, Chair Powell emphasized the Fed’s commitment to bringing inflation back to its 2% target while acknowledging the progress made in the US economy. He stated that the Fed believes its policy rate is likely at its peak for the current tightening cycle and that it may be appropriate to begin dialing back policy restraint later this year if the economy evolves as expected.

The dovish undertones in Powell’s testimony, suggesting a potential pause in rate hikes and eventual easing, led to a broad-based weakening of the US dollar against major currencies, particularly the Japanese yen. Market participants interpreted the Fed’s stance as a sign of a potential shift towards a more accommodative monetary policy in the near future.

The Bank of Japan

In contrast, the Bank of Japan maintained its ultra-loose monetary policy during its recent meeting. The BOJ decided to keep its short-term policy interest rate at -0.1% and continue its yield curve control program, purchasing a necessary amount of Japanese government bonds (JGBs) to keep 10-year JGB yields around 0%. The central bank also extended its deadline for loan disbursement under the Fund-Provisioning Measure to Stimulate Bank Lending by one year.

The divergence in monetary policy approaches between the Fed and the BOJ has been a driver of the USD/JPY exchange rate in recent months. While the Fed has been tightening its policy to combat inflation, the BOJ has remained dedicated to its accommodative stance to support the Japanese economy.

The sharp decline in the USD/JPY pair following Powell’s testimony shows the sensitivity of currency markets to changes in monetary policy expectations. As the Fed signals a potential slowdown in its tightening cycle, the relative attractiveness of the Japanese yen as a safe-haven currency has increased, leading to a surge in demand for the yen.

Publisher and editor of LJLNews. I am a Stock Market enthusiast, with an interest for politics. I hope you enjoy reading the articles! Contact me at: Lazaruslucas@ljlnews.com

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