The Japanese Yen (JPY) regained some ground after a modest decline the previous day as trade-related uncertainties kept investors on the sidelines and continued to favor traditional safe-haven assets. Additionally, data released today showed that Japan's core machine orders rose sharply in February, beating market expectations. This, coupled with hopes that Japan will reach a trade deal with the US and growing acceptance that the Bank of Japan (BOJ) will continue to raise interest rates in 2025, turned out to be another factor supporting the JPY.

Meanwhile, the hawkish BOJ expectations marked a major contrast to the growing bets for more aggressive policy easing by the Federal Reserve (Fed). This would lead to a further narrowing of the interest rate differential between Japan and the US, which in turn, supports prospects for a further appreciation move for the lower-yielding JPY. The US Dollar (USD), on the other hand, languished near multi-year lows amid concerns that the Trump administration's trade policies would hamper US economic growth. This has pushed the USD/JPY pair closer to a six-month low hit last week.

The Japanese Yen continues to find support from uncertainty over Trump's trade policies and expectations of an aggressive BoJ

US President Donald Trump's rapidly changing stance on trade tariffs continues to fuel uncertainty and support traditional safe-haven assets, including the Japanese Yen. Over the weekend, the Trump administration granted exemptions from high tariffs on smartphones, computers and other electronics that are mostly imported from China.

Additionally, Trump hinted on Monday that he was considering a possible exemption for the auto industry from the 25% tariffs already in place. However, Trump promised more tariffs on other key sectors such as semiconductors as early as next week and threatened to impose tariffs on pharmaceuticals in the near future. Data released on Wednesday showed that Japan's Core Machine Orders rose more than expected by 4.3% in February, marking the highest level in a year and a strong recovery from the 3.5% decline in January. Additional details from the report revealed that manufacturing orders rose 3%, while non-manufacturing orders jumped 11.4%.

This indicates improving business sentiment, which should support capital investment and boost employment. This, coupled with higher wages, could fuel demand-driven inflation. This keeps the door open for another BoJ rate hike during the first half of 2025 and has proven to be another factor supporting the JPY.

Investors remain optimistic about a positive outcome from the US-Japan trade talks. In fact, Trump said last week that tough but fair parameters are being set for negotiations. Additionally, US Treasury Secretary Scott Bessent said that Japan may be a priority in tariff negotiations, fueling hopes for a possible US-Japan trade deal.

Meanwhile, the recent unusual selloff in US Treasury bonds suggests that investors are losing confidence in the US economy, which continues to undermine the appeal of the US dollar. Moreover, traders have priced in the possibility that the Federal Reserve will resume rate cuts in June and reduce its policy rate by 100 basis points this year. Therefore, Fed Chair Jerome Powell's speech on Wednesday will be closely scrutinized for clues on the future path of rate cuts and determine the near-term trajectory of the USD. Meanwhile, US Retail Sales will allow traders to grab short-term opportunities around the USD/JPY pair later in the North American session. (Newsmaker23)

Source: FXstreet