The USD/JPY pair has surged sharply to nearly 158.00 during Tuesday’s European session, driven by a recovery in demand for risk-sensitive assets, which has diminished the safe-haven appeal of the Japanese Yen (JPY). Despite the US Dollar (USD) reaching a fresh two-year high in recent days, the Yen appears to be losing its strength as market participants focus on the upcoming US Consumer Price Index (CPI) data for December, scheduled for release on Wednesday.
While the Yen had outperformed the USD in the past three trading sessions, its momentum seems to be faltering ahead of the CPI report. Analysts at Bank of America (BofA) suggest that if US CPI comes in stronger than expected, it could reignite upward pressure on the USD/JPY pair, given the pair’s heightened sensitivity to CPI surprises.
Market expectations point to a slight increase in annual headline inflation to 2.8% for December, compared to 2.7% in November. Core CPI, which excludes volatile food and energy prices, is forecast to remain steady at 3.3%. Any indication that inflationary pressures are persisting could further dampen expectations for a dovish Federal Reserve (Fed), following the unexpectedly strong US Nonfarm Payrolls (NFP) data for December, which has already trimmed Fed dovish projections.
On the domestic front, the Japanese Yen will remain influenced by market speculation surrounding the Bank of Japan‘s (BoJ) potential interest rate decision at its upcoming policy meeting on January 24. BoJ Deputy Governor Ryozo Himino remarked on Tuesday that the board would consider raising rates based on the economic and price projections outlined in its quarterly outlook report, adding further uncertainty to the Yen’s near-term outlook.
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