The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) during the early European session, holding steady above a five-month low despite a negative bias. A strong inflation report from Japan on Friday raised expectations of a potential interest rate hike by the Bank of Japan (BoJ) in early 2025. However, uncertainty surrounding the BoJ’s future moves, combined with ongoing geopolitical risks, trade tensions, and speculations of potential government intervention, offers some support for the Yen.
Despite the inflation data, investor skepticism about the BoJ’s willingness to aggressively raise rates continues to weigh on the JPY. Additionally, the generally positive market sentiment and the Federal Reserve’s hawkish stance, which keeps US Treasury yields elevated, are adding pressure on the Yen. With the USD maintaining its bullish momentum, the outlook for the USD/JPY pair continues to lean towards further gains.
BoJ’s Rate Policy and US-Japan Yield Gap Weigh on JPY
Last week, the Bank of Japan decided to keep its short-term interest rate target unchanged, signaling limited expectations for rate hikes in the near term. Following comments from BoJ Governor Kazuo Ueda, Japanese government bond yields dropped to a one-month low, reinforcing concerns that the BoJ is in no rush to tighten monetary policy.
Meanwhile, US Treasury yields surged to a six-month high, exacerbating the widening yield differential between Japan and the US, which has contributed to the Yen’s weakness. On Friday, Japan’s National Consumer Price Index (CPI) exceeded expectations, suggesting that the BoJ could be more inclined to raise rates in early 2025.
The US Dollar saw some pullback after reaching a two-year high on Friday, following the release of the Personal Consumption Expenditure (PCE) Price Index, which showed signs of inflation moderation. The core PCE rose 2.8% annually, in line with October’s growth but below market expectations. Consumer spending in the US also climbed 0.4% in November, offering some reassurance about economic activity.
As investors await the US Consumer Confidence Index release this week, attention remains focused on the next potential moves in the USD/JPY pair.
Technical Outlook for USD/JPY
From a technical standpoint, the 156.00-155.95 area now serves as immediate support for the USD/JPY pair. A decline below this zone may present a buying opportunity near the 155.50 level, with further support seen around the 155.00 mark. However, if this psychological barrier is breached, the pair could face more significant downward pressure.
On the upside, the 157.00 mark is seen as a key resistance point, with further hurdles at 157.40-157.45 and the multi-month peak near 157.90. A breakout above 158.00 could signal further bullish momentum, with the USD/JPY pair eyeing 158.45 and potentially 159.00 in the near term.
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