Yen Scores Small, Nervous Gains On US Dollar In Wait For Japan CPI

USD/JPY Analysis and Charts

• USD/JPY ticked up in Asia, but pared gains in Europe
• Market interest-rate rethinks for the Bank of Japan and the Federal Reserve favor more Dollar gains
• Japanese inflation data may have prompted some caution

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The Japanese Yen managed some rare gains against the United States Dollar in Thursday’s Asian session. However, it retraced most of them through the European afternoon and the fundamental backdrop remains greatly in the Dollar’s favor.

Indeed USD/JPY soared above its 100-day moving average this week, to reach highs not seen since late November, having risen steadily and impressively into 2024. The rationale for this is easy enough to pin down and, unsurprisingly, has its roots in monetary policy expectations.

The foreign exchange market was pretty sure last month that the US Federal Reserve would fire the starting gun on interest rate cuts in the first three months of this year. However, this chance has been significantly repriced, with the odds of a cut in March now no better than 50%. They were briefly above 80% as the old year bowed out. The US economy has proven more resilient than many expected and, while inflation has surely come down, it remains well above target and that accounts for the latest repricing.

Crucially for USD/JPY, the market may well have gotten a bit ahead of itself when it comes to the Bank of Japan too. The BoJ had been widely expected to finally walk back the longest period of ultra-loose monetary policy in its (or anyone else’s) history this year. However, with Japanese inflation trending lower again, and clear uncertainty as to whether the domestic demand so desired by the BoJ has ignited, it seems unlikely that this walk-back is coming anytime soon. The devastating earthquake Japan experienced earlier this month has probably also moved any thoughts of tighter credit off the table.

So why might the Yen have ticked up? Well, the market is looking to Japanese December inflation data, due long after the European close. The annualized rate is expected to have ticked down to 2.3%. Should it do so, inflation would be back down to levels not seen since mid-2022, which would tend to undermine the Yen, However, given the current focus on Japan’s likely monetary path, it’s perhaps likely that the market should pause the release, giving the Japanese currency some respite.

USD/JPY Technical Analysis

USD/JPY Daily Chart Compiled Using TradingView

The Dollar crossed back above its 100-day moving average against the Yen on Wednesday when it topped 147.32, with that level now providing some near-term support. For now the broad uptrend channel in place since the market bounced on January 3 remains well-respected and offers resistance quite close to the current market at 148.86.

A break above this looks rather doubtful given that the Dollar is starting to look a little overbought at current levels. With the pair’s Relative Strength Index closing in on the 70.0 level which would indicate significant overbuying, any near-term forays above that channel top should probably be viewed with caution.

Fundamental momentum is likely to favor the Dollar over time though, and last year’s peak of 151.85 will probably be back in the bulls’ sights if no significant retracement is seen into month end. That peak was hit in November.

Reversals below the 147.00 psychological support are likely to find a near-term prop below it at 146.60. That’s the first Fibonacci retracement level of the rise up to that November top from the lows of last March.

IG’s own sentiment data finds traders strongly short of USD/JPY at current levels, although to such a great extent (70%) that a shift in favor of more Dollar gains looks likely.

–By David Cottle for DailyFX