Weak Japanese consumption data combined with rising Middle Eastern risk aversion sentiment, the US dollar continues to rebound against the yen

Reuters Finance App News — The US dollar against the Japanese yen (USD/JPY) continued its rebound during Tuesday’s Asian trading session, rising for the second consecutive trading day and reaching a high not seen in nearly four trading days. While markets digest Japan’s latest weak consumer data, they also continue to monitor US inflation data and the impact of Middle East tensions on the global foreign exchange market.

The latest data released by Japan’s Ministry of Internal Affairs and Communications shows that Japan’s household spending in March decreased by 2.9% year-on-year, significantly below market expectations, and further widened from the previous decline of 1.8%. This marks the fourth consecutive month of decline in Japanese household consumption, reflecting ongoing pressure on Japanese residents’ spending ability amid high inflation.

Data indicates that domestic food, energy, and living costs in Japan continue to rise, clearly eroding residents’ real income levels. Weak consumption has become one of the main pressures facing Japan’s economic recovery. Markets worry that if consumption remains sluggish, Japan’s economic growth momentum could further slow down.

Affected by the data, the yen generally weakened in Asian markets, with USD/JPY briefly rising to around 157.50. Meanwhile, ongoing tensions in the Middle East further diminished the yen’s safe-haven appeal. Previously, markets held expectations that the US and Iran might reach a peace agreement, but recent disagreements over nuclear plans and the ongoing deadlock in the Strait of Hormuz have reignited risk sentiment.

US President Trump recently stated that the current US-Iran ceasefire is “extremely fragile.” Markets believe this indicates that short-term regional risks in the Middle East are unlikely to ease significantly. Against this backdrop, the US dollar, as the global reserve currency, has seen some safe-haven capital inflows. Rising geopolitical risks generally support the dollar’s strength, while the yen is more influenced by domestic economic data.

However, although the dollar has risen against the yen in the short term, its overall upward momentum remains relatively limited. The reason is that market expectations for the Federal Reserve’s future monetary policy path are changing. Currently, the market widely expects the likelihood of further rate hikes by the Fed this year has significantly decreased. As signs of US economic growth slowing emerge, some institutions are betting that the Fed may resume a dovish cycle in the future. This limits the medium- to long-term upward potential of the dollar.

Meanwhile, the Bank of Japan (BOJ) continues to signal a more hawkish stance. The summary of the BOJ’s April meeting shows that policymakers still reserve room for further rate hikes. Markets believe that if Japan’s inflation remains high, the BOJ may continue to normalize monetary policy. This could gradually narrow the monetary policy gap between the US and Japan, thereby limiting further sharp gains in USD/JPY. The market is currently reassessing how future changes in the US-Japan interest rate differential might impact the exchange rate.

From a technical perspective, the daily chart of USD/JPY still shows a high-level oscillation pattern, with the price remaining above the medium-term moving average, but short-term bullish momentum has slowed. The MACD indicator remains above the zero line, indicating that the overall trend has not yet turned bearish. However, on the 4-hour chart, the price around 157.80 has encountered some technical resistance, and the RSI indicator is approaching overbought levels, suggesting a short-term consolidation may be needed. If USD/JPY can break through the 158 level effectively, it may test the 159 area; but if it falls below the 156.80 support, it could retreat back to around 155. The market’s focus has shifted to the upcoming US Consumer Price Index (CPI) data release tonight. If US inflation continues to exceed expectations, the dollar index could strengthen further, pushing USD/JPY higher; conversely, if inflation slows, market expectations for a Fed rate cut may increase, limiting dollar gains.

Overall, the USD/JPY market is currently trading on two conflicting narratives: “weak Japanese economy” and “Fed policy shift.” Future developments in Middle East tensions, US inflation data, and BOJ policy expectations will continue to drive exchange rate fluctuations.

Summary

The current USD/JPY trend exhibits typical “high-level consolidation” characteristics. On one hand, Japan’s persistent weak consumer data suppresses the yen; on the other hand, the cooling of Fed rate hike expectations and the potential for BOJ rate hikes limit the dollar’s further strength. Meanwhile, escalating Middle East tensions have re-strengthened the dollar’s safe-haven appeal, significantly boosting market risk sentiment. The most critical variables moving forward will be US inflation data, the Fed’s policy trajectory, and whether the BOJ continues to normalize monetary policy. From a broader perspective, USD/JPY may remain in a high-level consolidation in the short term, but as global monetary policy divergence narrows, volatility could increase further.

(Author: Wang Zhiqiang HF013)

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