The Japanese yen strengthened against the US dollar on Tuesday, climbing to around 149.5 per dollar, after data showed US industrial output fell more than expected in February, reinforcing expectations that the Federal Reserve may cut interest rates later this year.
The US industrial production index declined 0.7% month-over-month in February, according to the Federal Reserve, worse than the 0.3% drop forecast by economists. Manufacturing output, which accounts for the bulk of industrial production, fell 0.8%, dragged down by weakness in the production of motor vehicles and parts.
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The data suggests that the US economy is losing momentum, which could give the Fed cover to begin easing monetary policy. According to the CME FedWatch Tool, markets are now pricing in a 65% probability of a rate cut at the Fed’s September meeting, up from 55% a week ago.
Safe-Haven Appeal Boosts Yen
The yen, traditionally viewed as a safe-haven currency, also benefited from a broader risk-off mood in financial markets. US stock index futures edged lower on Tuesday as investors digested the weak industrial data and monitored developments in the US banking sector.
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The USD/JPY pair has now given back most of the gains it made in the wake of the Bank of Japan’s decision to end its negative interest rate policy earlier this month. The BOJ raised its benchmark rate to a range of 0.0% to 0.1% from -0.1%, but Governor Kazuo Ueda struck a cautious tone on further tightening, which initially weighed on the yen.
Technical Levels to Watch
Traders are now watching the 149.00 level as immediate support for USD/JPY. A break below that could open the door to a test of the 148.50 area, a level not seen since early March. On the upside, resistance is seen at 150.00 and then 150.50.
The next major catalyst for the pair will be the US Personal Consumption Expenditures (PCE) price index report, due later this week, which is the Fed’s preferred inflation gauge. A softer-than-expected reading could further fuel rate-cut bets and add to the yen’s gains.
