The Japanese Yen (JPY) strengthened against the US Dollar (USD) on Friday, as the USD/JPY pair pulled back from recent gains following the release of Tokyo Consumer Price Index (CPI) inflation data. The data boosted expectations that the Bank of Japan (BoJ) may proceed with an interest rate hike in January.
Tokyo’s headline CPI inflation rose to 3.0% year-on-year (YoY) in December, up from 2.6% in November. Core CPI, which excludes fresh food and energy, increased to 2.4% YoY, surpassing November’s 2.2% but slightly below the expected 2.5%. This stronger-than-anticipated inflation data supports the case for tightening monetary policy, with the BoJ poised to adjust its stance if economic conditions continue to align with projections.
In its December meeting, the BoJ released a summary of opinions, noting that adjustments to easing measures could be considered if the economy meets expectations. One BoJ member highlighted the importance of monitoring wage negotiations, while another stressed the need to evaluate data for any necessary changes to monetary support.
As inflation expectations rise, the JPY’s appreciation is gaining momentum, buoyed by the increased likelihood of a rate hike. Meanwhile, the US Dollar Index (DXY), which measures the USD against six major peers, hovered around 108.10, slightly below its highest level since November 2022. However, the USD’s upside potential may be capped by subdued US Treasury yields. At the time of writing, the 2-year and 10-year US Treasury yields stood at 4.32% and 4.57%, respectively.
The downside risk for USD/JPY is limited, as the US Dollar remains supported by expectations of fewer rate cuts from the US Federal Reserve (Fed). In its December meeting, the Fed reduced rates by a quarter point and revised its 2025 forecast, signaling only two rate cuts instead of the previously projected four. However, these expectations were tempered by moderate US PCE inflation data.
On Friday, Japan’s Finance Minister Katsunobu Kato expressed concern over sharp, one-sided foreign exchange movements, warning that measures would be taken against excessive FX volatility.
The BoJ’s October meeting minutes, released earlier this week, reiterated the possibility of gradual rate hikes if inflation trends align with expectations. BoJ Governor Kazuo Ueda also affirmed last week that Japan’s economy is expected to move closer to achieving the BoJ’s 2% inflation target sustainably by next year, with the timing and pace of any policy adjustments depending on economic activity, prices, and financial conditions.
As for technical levels, USD/JPY was trading around 157.70 on Friday. The pair continues to follow a bullish trend within an ascending channel. The 14-day Relative Strength Index (RSI) is just below the 70 level, suggesting that the pair could be approaching overbought conditions, which may trigger a downward correction.
The immediate upside target is the monthly high of 158.08, with potential to extend towards the upper boundary of the ascending channel near 160.30. On the downside, primary support lies at the nine-day Exponential Moving Average (EMA) around 156.48, aligning with the lower boundary of the ascending channel.
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