The Japanese Yen (JPY) maintained its strength against the US Dollar (USD) on Monday, with the USD/JPY pair subdued amid growing expectations that the Bank of Japan (BoJ) may raise interest rates in January. These expectations were fueled by last week’s release of Tokyo’s Consumer Price Index (CPI) inflation data.
Japan’s Jibun Bank Manufacturing PMI for December came in at 49.6, slightly above the flash estimate of 49.5 and an improvement from November’s 49.0. While this marks the highest level since September, it still indicates a sixth consecutive month of declining factory activity.
The Nikkei 225 dropped to around 39,950, reversing gains from the past two days. The decline followed a slight drop in US futures after Wall Street’s slump on Friday, driven by rising Treasury yields and indications of more restrained interest rate cuts in 2025.
US Dollar Faces Pressure as Treasury Yields Dip
The US Dollar Index (DXY), which tracks the USD against six major currencies, is trading around 108.00. The USD faces challenges as US Treasury yields dip on Monday, with 2-year and 10-year yields at 4.32% and 4.62%, respectively.
The USD could find support from growing expectations that the US Federal Reserve (Fed) will slow its pace of rate cuts next year. The Fed’s hawkish stance following its December meeting, in which it cut its benchmark interest rate by 25 basis points, continues to weigh on markets. The latest Dot Plot projections indicate two rate cuts in 2025.
BoJ Policy and Inflation Data Signal Potential Rate Hike
In Japan, the Tokyo CPI inflation rose to 3.0% YoY in December, up from 2.6% in November. Excluding fresh food and energy, Tokyo CPI increased to 2.4% YoY, surpassing the previous month’s 2.2% but slightly below the expected 2.5%. This rise in inflation is fueling speculation that the BoJ may adjust its easing measures in response.
The BoJ’s December meeting minutes, released on Friday, indicated that the central bank may gradually raise rates if inflation trends align with expectations. The BoJ’s cautious approach to monetary policy remains focused on managing wage-driven growth, domestic and global uncertainties, and fiscal measures to combat deflationary pressures.
BoJ Governor Kazuo Ueda has indicated that the central bank expects Japan’s economy to move closer to its 2% inflation target next year. He also emphasized that the timing and pace of any monetary adjustments will depend on economic activity, prices, and financial conditions.
Technical Outlook: USD/JPY Tests Monthly Highs
The USD/JPY pair is trading near 157.80, maintaining its bullish trend within an ascending channel on the daily chart. The 14-day Relative Strength Index (RSI) is hovering just below the 70 level, indicating continued bullish momentum. However, if the RSI exceeds 70, it could signal an overbought condition, leading to a potential pullback.
On the upside, the USD/JPY pair may target its monthly high of 158.08, reached on December 26. A break above this level could open the door for further gains, with the next resistance potentially near 160.60, the upper boundary of the ascending channel.
On the downside, immediate support is at the nine-day Exponential Moving Average (EMA) around 156.79, aligning closely with the ascending channel’s lower boundary near 156.50. A break below these levels could signal further weakness for the USD/JPY pair.
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