The Japanese Yen (JPY) saw gains against the US Dollar (USD) on Friday, as the USD/JPY pair retraced some of its recent advances following the release of Tokyo’s Consumer Price Index (CPI) inflation data. The data, which pointed to rising inflation, is expected to keep the Bank of Japan (BoJ) on track for an interest rate hike in January.
Tokyo CPI Inflation Rises
Tokyo’s headline CPI inflation rose to 3.0% year-on-year (YoY) in December, up from 2.6% in November, while the Tokyo CPI excluding fresh food and energy increased to 2.4% YoY, compared to 2.2% the previous month. Although the Tokyo CPI excluding fresh food also climbed to 2.4% YoY, slightly below the expected 2.5%, the figure still marked an increase from November’s 2.2%.
The BoJ’s Summary of Opinions from its December monetary policy meeting, released on Friday, indicated that the central bank plans to adjust its easing measures if economic conditions align with its expectations. One BoJ board member emphasized the importance of monitoring wage negotiations, while another highlighted the need for close scrutiny of data to determine future changes to monetary support.
BoJ’s Rate Hike Expectations Boost JPY
The strength of the Japanese Yen is attributed to growing speculation that the BoJ may hike interest rates in the near future. Meanwhile, the US Dollar Index (DXY), which tracks the value of the USD against six major currencies, is trading around 108.10, just below its highest level since November 2022. However, the upside of the USD may be capped, as US Treasury bond yields remain subdued. As of Friday, 2-year and 10-year Treasury yields stand at 4.32% and 4.57%, respectively.
The USD/JPY pair’s downside may be limited by expectations that the US Federal Reserve will reduce the pace of rate cuts. In its December meeting, the Fed announced a quarter-point rate cut and revised its 2025 forecast to only two rate cuts, down from the previously projected four. Despite this, the likelihood of further rate cuts next year has been tempered by moderate US PCE inflation data.
Japan’s Finance Minister Warns Against Excessive FX Moves
On Friday, Japan’s Finance Minister Katsunobu Kato expressed concerns over “one-sided and sharp” foreign exchange moves. Kato stated that Japan would take appropriate measures against excessive foreign exchange fluctuations.
BoJ’s Cautious Approach to Rate Hikes
The BoJ’s October meeting minutes, released this week, reiterated the possibility of gradual rate hikes if inflation trends remain in line with expectations. The minutes suggested a potential path to a 1.0% policy rate by late fiscal 2025, emphasizing caution in monetary policy adjustments due to uncertainties in both domestic and global markets. BoJ Governor Kazuo Ueda also commented last week, saying that the Japanese economy is expected to move closer to achieving the BoJ’s 2% inflation target next year. He noted that the timing and pace of any changes to monetary accommodation would depend on economic conditions, prices, and financial conditions.
USD/JPY Technical Outlook
On Friday, the USD/JPY traded around 157.70. Technical analysis indicates a continued bullish trend, with the pair moving upwards within an ascending channel pattern. The 14-day Relative Strength Index (RSI) is just below 70, reinforcing the bullish outlook. A breakout above 70 could signal an overbought condition, leading to a potential correction.
The pair could test its monthly high at 158.08, reached on Thursday. A break above this level would open the door for further gains, targeting the upper boundary of the ascending channel near 160.30.
On the downside, the USD/JPY pair could find primary support at the nine-day Exponential Moving Average (EMA) around 156.48, which aligns with the lower boundary of the ascending channel.
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