The Japanese Yen (JPY) made notable gains against the US Dollar (USD) on Friday, as the USD/JPY pair retreated from recent highs. The Yen’s strength followed the release of Tokyo’s Consumer Price Index (CPI) inflation data, which is expected to support the Bank of Japan‘s (BoJ) anticipated interest rate hike in January.
Tokyo’s CPI inflation surged to 3.0% year-on-year (YoY) in December, up from 2.6% in November. Excluding fresh food and energy, the CPI rose by 2.4% YoY in December, a slight increase from the previous month’s 2.2%. Similarly, the core CPI excluding fresh food also climbed to 2.4% YoY, slightly missing the expected 2.5%, but still higher than November’s 2.2%.
The BoJ also released a summary of opinions from its December monetary policy meeting, signaling a potential shift in its accommodative stance if economic conditions remain favorable. One BoJ board member stressed the importance of tracking wage negotiations, while another emphasized careful data monitoring to guide future monetary decisions.
With inflation expectations rising, the likelihood of a BoJ interest rate hike in January has increased, giving the Yen a boost. Meanwhile, the US Dollar Index (DXY), which measures the USD against six major currencies, stood at around 108.10, slightly below its highest level since November 2022. However, the USD’s upside may be limited, as US Treasury bond yields remained subdued, with the 2-year and 10-year yields at 4.32% and 4.57%, respectively.
Despite the pullback in USD/JPY, the US Dollar continues to benefit from expectations of fewer rate cuts by the Federal Reserve (Fed). After its December meeting, the Fed reduced interest rates by a quarter point and revised its 2025 projections to just two rate cuts, down from the previously forecasted four. The reduced likelihood of further rate cuts was influenced by moderate US Personal Consumption Expenditures (PCE) inflation data.
Japan’s Finance Minister, Katsunobu Kato, commented on the recent sharp and one-sided foreign exchange movements, warning that the government would take appropriate measures against excessive volatility in the FX market.
The BoJ’s October meeting minutes, released earlier this week, reiterated the possibility of gradual rate hikes if inflation trends remain stable, with a potential target of 1.0% by the end of fiscal 2025. The BoJ also emphasized a cautious approach to monetary policy, balancing economic growth and inflation amid global uncertainties.
BoJ Governor Kazuo Ueda recently stated that Japan’s economy is expected to move closer to achieving the BoJ’s 2% inflation target by next year, with the pace and timing of monetary adjustments to depend on economic and financial conditions.
At the time of writing, USD/JPY was trading around 157.70. The pair remains in an ascending channel pattern, with the 14-day Relative Strength Index (RSI) nearing the 70 mark, suggesting a possible overbought condition. A breakout above this level could lead to a downward correction, while a further advance could see the pair test its monthly high of 158.08, with a potential target of 160.30.
On the downside, support is expected near the nine-day Exponential Moving Average (EMA) at 156.48, aligned with the channel’s lower boundary.
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