The Japanese yen continued to weaken against its US counterpart for the third straight day on Monday (3/24) and continued to weaken in response to weaker March Purchasing Managers' Index (PMI). Moreover, positive sentiment in equity markets was seen as another factor undermining the safe-haven JPY. However, the possibility of further interest rate hikes, supported by expectations that strong wage growth could fuel broader inflation trends, might hold JPY investors from placing aggressive bets.

Additionally, the recent narrowing of interest rate differentials between Japan and its peers should help limit any deeper losses for the JPY. Meanwhile, prospects of further policy easing by the Federal Reserve (Fed) failed to help the US Dollar (USD) capitalize on its three-day recovery move from multi-month lows touched last week and might contribute towards keeping a lid on the USD/JPY pair. Traders now look forward to the release of US flash PMIs for some impetus, though the fundamental backdrop seems tilted towards a JPY uptick.

Japanese Yen pressured by upbeat market sentiment, weaker PMI data for March

According to the preliminary estimate released on Monday, the Au Jibun Bank of Japan Manufacturing PMI fell from 49.0 in the previous month to 48.3 in March 2025. This marked the lowest reading since March 2024 and the ninth straight month of contraction.

In addition, the services sector, previously a bright spot in the Japanese economy, also lost momentum and contracted for the first time in five months. Furthermore, the overall business outlook fell to its lowest level since August 2020, which was seen weighing on the Japanese Yen.

Reports over the weekend indicated that Trump is planning a narrower and more targeted agenda for the so-called reciprocal tariffs that will take effect on April 2. This fueled hopes for less disruptive Trump tariffs and boosted investor confidence, further weakening the safe-haven JPY. The results of Japan's annual spring labor negotiations revealed that companies agreed to union demands for strong wage growth for a third straight year. In addition, inflation in Japan remains above the central bank's 2% target, leaving the door open for further interest rate hikes by the Bank of Japan.

In addition, BoJ Governor Kazuo Ueda said last week that the central bank wants to act before it is too late. Ueda added that achieving the 2% inflation target is important for long-term credibility and the BoJ will continue to adjust the pace of easing if that prospect is to be realized.

BoJ Vice Governor Shinichi Uchida said that the central bank will adjust the pace of monetary easing by raising the policy rate if the economic and price outlook is to be achieved. The BoJ will continue to assess the economic and financial market situation at home and abroad, he added.

Meanwhile, the Federal Reserve raised its inflation projections, although it maintained its forecast for two more 25 basis point interest rate cuts by the end of this year. This capped the recent recovery in the US dollar from multi-month lows and should cap gains for the USD/JPY pair.

Traders now look forward to the release of US PMIs, which, along with speeches by influential FOMC members, might provide some impetus. However, the focus will be on the release of Tokyo CPI and US Personal Consumption Expenditure (PCE) Price Index on Friday.(Newsmaker23)

Source: FXstreet