The Japanese Yen (JPY) weakened against the US Dollar (USD) at the start of the week, partially eroding the gains made on Friday after a five-month low. Investors remain cautious about the Bank of Japan‘s (BoJ) stance on future interest rate hikes, while a generally positive risk sentiment and a widening US-Japan yield differential continue to weigh on the lower-yielding yen.
BoJ’s Dovish Tone and US-Japan Yield Gap Pressure JPY
Despite strong inflation data from Japan last week, the BoJ has refrained from signaling immediate interest rate hikes. This leaves market participants uncertain about the timing of the next rate move, potentially in January or March 2025. Meanwhile, the US Federal Reserve’s hawkish tilt, which has led to a rise in US government bond yields, has resulted in a widening yield gap between the US and Japan, further undermining the yen.
The BoJ’s cautious stance on rate hikes, underscored by Governor Kazuo Ueda’s dovish comments last week, coupled with declining Japanese government bond yields, has contributed to the JPY’s weakness. By contrast, the benchmark 10-year US Treasury yield reached its highest level in over six months, exacerbating the pressure on the yen.
Inflation Data Provides Hope for BoJ Action
Japan’s National Consumer Price Index (CPI) rose more than expected in November, fueling speculation that the BoJ could raise interest rates in early 2025. However, with limited clarity from the BoJ on its rate hike timeline, traders remain cautious about placing aggressive bets on the JPY.
US Economic Data Shows Signs of Inflation Moderation
On the US side, the USD retreated from a two-year high after the release of the Personal Consumption Expenditures (PCE) Price Index on Friday. The data showed signs of inflation moderation, with the core PCE increasing by 2.8% year-over-year in November, in line with October’s figures but below the expected 2.9%. Additionally, US personal income growth slowed sharply to 0.3% in November, down from 0.7% in October, while consumer spending rose by 0.4%.
Technical Outlook for USD/JPY
The USD/JPY pair currently faces resistance near the 157.00 round-figure mark. On the downside, support is seen around the 156.00-155.95 area, with a further decline potentially attracting buying interest near the 155.50 zone. A decisive break below 155.00 could shift the bias toward bearish traders, pushing the pair lower.
On the upside, a move above 157.00 could open the door for further gains, with the next resistance levels at 157.40-157.45 and the multi-month high of 157.90. A breakout above the 158.00 mark could trigger additional bullish momentum, with targets at 158.45 and 159.00.
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