The Japanese Yen (JPY) saw some intraday selling on Friday after reaching its highest level against the US Dollar (USD) in nearly a month during the Asian session. Despite this, meaningful JPY depreciation appears unlikely, with market expectations for a rate hike from the Bank of Japan (BoJ) strengthening the Yen’s position.
BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino have both recently signaled the likelihood of further tightening if economic conditions and price pressures continue to improve. Additionally, Japan’s Producer Price Index (PPI) showed a 3.8% year-on-year increase for December, continuing a streak of rising prices for the 46th consecutive month. This further supports market expectations that the BoJ will raise its policy rate at its meeting next week, with a 79% probability of a 25 basis-point hike.
US Inflation Data Weakens USD
In contrast, the US Dollar remains subdued, driven by signs of slowing inflation. This week’s US economic data, including softer-than-expected Producer Price Index (PPI) and Consumer Price Index (CPI) figures, led to market speculation that the Federal Reserve (Fed) may be more inclined to cut interest rates later in the year. Retail Sales for December rose 0.4%, and initial jobless claims increased to 217,000, surpassing expectations. These factors have contributed to a drop in US Treasury bond yields, narrowing the yield differential between the US and Japan, which is supportive of the Yen.
Fed Governor Christopher Waller further fueled expectations of rate cuts, suggesting that inflation could ease enough for the central bank to reduce rates multiple times this year. This dovish outlook from the Fed has added downward pressure on the USD and capped any attempts at a recovery in the USD/JPY pair.
Technical Outlook for USD/JPY
From a technical perspective, the USD/JPY pair faces resistance around the 156.00 level, with further hurdles at 156.30-156.35. Any attempt to break above these levels could see the pair targeting the 157.00 mark, and potentially reaching the 158.00 level. On the downside, if the pair falls below the 155.00 psychological level, it could extend losses towards the 154.60-154.55 region, where the lower boundary of a multi-month-old ascending channel lies. A sustained break below this zone could further weaken the USD/JPY pair, opening the door to additional declines towards the 153.35-153.30 area.
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