The Japanese Yen (JPY) trimmed some intraday gains against the US Dollar (USD) on Monday but maintained a positive bias, hovering near a multi-week high reached last Friday. The JPY’s strength is supported by an uptick in Japan’s Core Machinery Orders for the second consecutive month, signaling further recovery in capital expenditure. Market participants are also speculating that the Bank of Japan (BoJ) will raise interest rates at its upcoming policy meeting later this week, providing additional support to the Yen.
Despite these bullish factors, the USD/JPY pair failed to build on Friday’s rebound from sub-155.00 levels, held back by persistent US Dollar weakness and market caution ahead of US President-elect Donald Trump’s inaugural address. The ongoing uncertainty surrounding Trump’s trade policies and the BoJ’s monetary policy outlook is keeping traders on edge, with many opting to remain on the sidelines until clearer guidance emerges.
Core Machinery Orders Boost JPY, but Traders Cautious Ahead of Key Events
Japan’s Core Machinery Orders rose 3.4% month-on-month in November 2024, marking the second consecutive month of growth and the strongest increase in nine months. This, combined with rising inflation and strong wage growth in Japan, has led to expectations of a rate hike from the BoJ at its meeting on January 23-24. These factors have bolstered the JPY, with analysts noting hawkish comments from BoJ officials, including Deputy Governor Ryozo Himino, who stated that the central bank would discuss the possibility of a rate hike as sustained wage gains become more likely.
BoJ Governor Kazuo Ueda also voiced optimism, highlighting positive developments in the wage outlook and reaffirming that further rate hikes could occur this year if economic and price conditions continue to improve. A BoJ report earlier this month showed that wage hikes were spreading across firms of all sizes, strengthening the case for a near-term rate increase.
However, JPY bulls are cautious, with many preferring to stay on the sidelines ahead of President Trump’s inaugural address and the BoJ’s two-day policy meeting. This reluctance is exacerbated by mixed signals from the US economy. Recent data showed a slowdown in underlying US inflation, fueling speculation that the Federal Reserve might consider cutting interest rates in 2025. Federal Reserve Governor Christopher Waller also suggested that inflation is likely to ease, and further rate reductions could be possible.
US Economic Data and USD/JPY Technical Outlook
US economic data released last week provided a mixed picture. Housing Starts rose by 3.3% in December, hitting a seasonally adjusted annual rate of 1.50 million units, the highest level since February 2024. However, Building Permits fell 0.7% in December, a stark contrast to the 5.2% growth recorded in the previous month. Additionally, the yield on the 10-year US government bond rebounded, which helped the US Dollar recover from a four-day losing streak, offering some support to the USD/JPY pair.
Technically, the USD/JPY pair faces challenges, with Friday’s bounce from support near the lower boundary of a multi-month ascending channel faltering at the 156.55-156.60 resistance zone. A sustained break above this level could trigger a short-covering rally, pushing the pair towards the 157.00 round figure and potentially extending toward the 158.00 level. However, the immediate downside is supported near 155.25, with a break below 155.00 marking a bearish signal. A sustained decline could push the pair towards the 154.60-154.55 region, with further support at 153.35-153.30.
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