The Japanese Yen (JPY) is relatively unchanged against the US Dollar (USD) on Monday, as the USD/JPY pair holds steady. The Yen receives support from expectations that the Bank of Japan (BoJ) may raise interest rates in January, following the release of stronger-than-expected Tokyo Consumer Price Index (CPI) inflation data last week.
Japan’s Jibun Bank Manufacturing PMI for December came in at 49.6, slightly surpassing the flash estimate of 49.5 and showing an improvement from November’s 49.0. Although it marked the highest reading since September, it still signals the sixth consecutive month of contraction in factory activity.
The Nikkei 225 index fell to around 39,950 on Monday, ending a two-day rally. This decline followed a slight drop in US futures after Friday’s Wall Street slump, which was triggered by rising Treasury yields and indications that the US Federal Reserve (Fed) may take a more cautious approach to interest rate cuts in 2025.
USD Faces Pressure Amid Lower Treasury Yields
The US Dollar Index (DXY), which measures the USD against six major currencies, trades around 108.00. The Greenback is facing headwinds as US Treasury bond yields depreciate on Monday. At the time of writing, 2-year and 10-year Treasury yields stand at 4.30% and 4.59%, respectively.
While the USD could receive support from growing expectations of fewer rate cuts by the Fed next year, traders are still processing the Fed’s hawkish stance. The Fed reduced its benchmark interest rate by 25 basis points in December, and its latest Dot Plot projections indicate just two rate cuts in 2025, which may help maintain upward pressure on the USD.
Inflation Data Supports BoJ’s Policy Shift
The Tokyo CPI inflation rose to 3.0% year-over-year in December, up from 2.6% in November. Meanwhile, the Tokyo CPI excluding fresh food and energy climbed to 2.4%, slightly below the expected 2.5% but higher than November’s 2.2%. These inflation figures have bolstered expectations that the BoJ could take steps toward tightening monetary policy.
Japan’s Finance Minister, Katsunobu Kato, expressed concern over sharp, one-sided foreign exchange movements, stating that the government would take appropriate measures against excessive FX volatility.
The BoJ’s December meeting minutes, released on Friday, revealed that the central bank may adjust its easing policies if economic conditions align with its expectations. One BoJ board member highlighted the importance of monitoring wage growth, while another emphasized the need to assess data before making changes to monetary support. The BoJ’s October meeting minutes also reiterated the possibility of gradual rate hikes if inflation trends continue as expected, with a potential path toward 1.0% by late fiscal 2025.
Earlier this month, BoJ Governor Kazuo Ueda stated that Japan’s economy is expected to move closer to achieving the BoJ’s 2% inflation target next year. Ueda emphasized that any adjustments to monetary policy would depend on economic activity, prices, and financial conditions.
Technical Analysis: USD/JPY Remains Subdued Below Monthly Highs
The USD/JPY pair is trading near 157.80 on Monday, maintaining its bullish momentum within an ascending channel on the daily chart. The 14-day Relative Strength Index (RSI) hovers just below the 70 level, supporting the ongoing bullish trend. However, if the RSI surpasses 70, it could signal an overbought condition, potentially leading to a downward correction.
On the upside, the pair may revisit its monthly high of 158.08, reached on December 26. A decisive break above this level could open the door for further gains, with the pair targeting the upper boundary of the ascending channel near 160.60.
Immediate support for USD/JPY is located at the nine-day Exponential Moving Average (EMA) around 156.79, with additional support near the lower boundary of the ascending channel around 156.50.
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