The Japanese Yen (JPY) made modest intraday gains on Wednesday, supported by a subdued US Dollar (USD), which led to a pullback in the USD/JPY pair from a near two-week high reached the previous day. Despite the JPY’s resilience, bulls remain cautious due to uncertain expectations surrounding the Bank of Japan’s (BoJ) potential interest rate hike in December.
Adding to the JPY’s challenges, the recent recovery in US Treasury bond yields is seen as a headwind for the lower-yielding Yen. Meanwhile, the US Dollar remains supported by expectations that the Federal Reserve (Fed) will adopt a more cautious stance on cutting rates, helping to limit further downside for USD/JPY. Traders are also adopting a wait-and-see approach ahead of the release of key US consumer inflation data later on Wednesday.
BoJ Rate Hike Uncertainty Clouds JPY Outlook
The Japanese economy showed signs of strength on Wednesday, with a report from the Bank of Japan revealing that Japan’s Producer Price Index (PPI) rose 0.3% in November, and increased 3.7% year-over-year. This comes on the heels of last week’s wage growth data, which showed October’s base pay rose 2.7% YoY, the fastest growth since November 1992. These figures could provide the BoJ with more justification to raise interest rates.
BoJ Governor Kazuo Ueda has also suggested that the timing of the next rate hike is nearing, but some media reports have hinted that the central bank may hold off on tightening at its December meeting. Adding to the uncertainty, BoJ board member Toyoaki Nakamura expressed caution, indicating that the central bank should proceed carefully in raising rates.
US Treasury Yields and Fed Expectations Support USD
US Treasury yields surged to their highest levels in at least a week on Tuesday, fueled by growing market consensus that the Federal Reserve will take a cautious approach to rate cuts. This has helped the US Dollar maintain its recent gains, providing support for the USD/JPY pair as traders await the release of US Consumer Price Index (CPI) data later today.
The headline US CPI for November is expected to rise to 0.3% month-over-month, up from 0.2% in October, while the year-over-year inflation rate is projected to increase to 2.7% from 2.6%. Core CPI, which excludes food and energy prices, is forecast to remain steady at 0.3% for the month and 3.3% YoY. While these figures may raise concerns about persistent inflation, they are unlikely to derail expectations of a rate cut by the Fed at next week’s meeting, though they could temper the pace of future cuts.
Technical Outlook: USD/JPY Bulls Remain Cautious
The USD/JPY pair faced resistance near the 152.00 level, coinciding with the 200-day Simple Moving Average (SMA), which led to a pullback. Neutral oscillators on the daily chart suggest caution, with traders advised to wait for a sustained break above this key level before targeting further upside. A move above 152.00 could pave the way for a rally to the 152.70-152.75 region, followed by the 153.00 round figure and potentially the 153.70 area, which aligns with the 61.8% Fibonacci retracement level of the recent downtrend from November’s multi-month high.
On the downside, the 151.55-151.50 region is key support. A dip below this level could trigger buying interest around the psychological 151.00 mark. However, a sustained break below this support could expose the 150.00 level, with further downside targets at the 23.6% Fibonacci level near 150.50, and then the 149.55-149.50 zone. Failure to hold above these levels would suggest a deeper pullback, potentially towards the 149.00 figure and 148.65, the lowest level since October 11.
Traders will closely monitor US CPI data, as it could be pivotal in shaping the Fed’s rate outlook and, consequently, the USD/JPY’s near-term direction.
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