Intervention, Data, and Expectations
The Japanese yen experienced a volatile Tuesday, retracing some of its previous gains against the US dollar. This followed suspected intervention by Japanese authorities on Monday, which had temporarily strengthened the yen.
The yen's decline on Tuesday came amidst a backdrop of strong US economic data. The data showed that labor costs in the US increased more than expected in the first quarter, fueled by rising wages and benefits. This confirmed the surge in inflation earlier in the year, potentially delaying anticipated interest rate cuts later this year.
Analysts believe that for the yen to appreciate further, either policy divergence needs to converge or the US bond market needs to see a more sustainable bid. Additionally, a change in rhetoric from the Bank of Japan (BOJ) could also support the yen.
The BOJ left its plan for monthly bond buying unchanged for May, leaving investors looking for clues on the timing of a taper. A taper would lead to higher, more attractive yields, potentially supporting the yen.
Meanwhile, the US Federal Reserve began its two-day monetary policy meeting on Tuesday. While no rate changes are expected, Chair Jerome Powell's comments will be closely watched for signs of the central bank's policy path in light of recent data.
Markets have pushed back expectations for a rate cut this year, with odds for a cut in September of at least 25 basis points now slightly below 50%.
The US dollar index gained ground on Tuesday, while the euro and sterling weakened. The dollar index is on track for its biggest monthly gain since January, while the euro and sterling are poised for their biggest monthly drops since September.
Analysts at Bank of America remain bullish on the US dollar, advocating for buying the greenback dips in anticipation of further gains in the second quarter.
Meanwhile, European Central Bank (ECB) policymakers expressed confidence that the ECB will be able to start lowering interest rates in early June, citing recent inflation data.