During the early Asian session on Monday, the USD/JPY pair managed to climb above the 145.00 mark, showing resilience despite the broader decline in the US Dollar (USD). Trading at 145.06 at the time of writing, the pair has recorded a modest 0.12% gain for the day.
The unexpected decline in the US Producer Price Index (PPI) for December has raised speculations about potential interest rate cuts by the Federal Reserve (Fed) this year. With the market pricing in an 86% likelihood of a rate cut by March, and the overall 2024 easing cycle projected at approximately 166 basis points (bps), compared to the 75 bps outlined by the Fed dot plot, the USD’s upside may face constraints, posing a challenge for the USD/JPY pair.
Meanwhile, Japan’s two-year yield has slipped back below zero for the first time since July 2023. Reports suggest that the Bank of Japan (BOJ) is expected to revise its core inflation forecast for the fiscal year 2024, originally at 2.8%, citing the recent dip in oil prices. Despite global economic uncertainties and subdued spending, the BOJ is likely to maintain its projection of trend inflation remaining near its 2% target in the coming years.
In the upcoming week, the market will keep an eye on the Japanese Machine Tool Orders on Monday, though its impact may be limited. Later in the week, the Japanese Producer Price Index and the US NY Empire State Manufacturing Index are set for release on Tuesday, followed by the US Retail Sales data on Wednesday. Traders are expected to scrutinize these figures for potential trading opportunities within the USD/JPY pair amid ongoing expectations of divergent monetary policies between the Fed and the BOJ.
