USD/JPY Dynamics Amid US Inflation Data and BoJ Policy Stance

The Japanese Yen (JPY) experienced a downturn against the US Dollar (USD) on Tuesday, reacting to unexpected US consumer price increases in November and reports of the Bank of Japan’s (BoJ) inclination to maintain negative interest rates.

This development, coupled with the prevailing risk-on market sentiment, has weakened the traditionally safe-haven JPY, thereby supporting a recovery in the USD/JPY pair from the 144.70 level in the overnight trade.

However, growing expectations of a policy shift by the BoJ and potential geopolitical tensions in the Middle East are preventing traders from strongly betting against the JPY. The uncertainty regarding the Federal Reserve’s interest rate reduction timeline in 2024 is also limiting gains for the USD and consequently, capping the rise in the USD/JPY pair.

Traders are likely to adopt a cautious stance in anticipation of the Federal Open Market Committee (FOMC) policy meeting’s outcome.

Key Central Bank Decisions in Focus

The Federal Reserve is expected to announce its rate decision in the US session, with markets anticipating a hold on interest rates. Key insights are expected from the accompanying monetary policy statement, updated economic forecasts, including the “dot plot”, and Fed Chair Jerome Powell’s post-meeting press conference.

These elements are crucial in shaping the near-term policy outlook and will significantly influence USD dynamics, impacting the USD/JPY pair’s trajectory ahead of next week’s BoJ meeting.

US Labor Department’s CPI Report and Market Reaction

The US Labor Department reported a modest 0.1% rise in the headline Consumer Price Index (CPI) for November, with the annual rate easing to 3.1% from 3.2%. The annual core CPI inflation remained steady at 4.0%, reflecting a marginal month-over-month increase.

Despite inflation rates being above the Federal Reserve’s 2% target, robust US jobs data led investors to reassess expectations for a March rate cut. This adjustment in market expectations facilitated a recovery for the USD, aiding the USD/JPY pair to find buyers near the 144.70 level, albeit without strong momentum.

Technical Outlook for USD/JPY

From a technical perspective, the USD/JPY pair showed a bearish trend yesterday but is currently fluctuating around 145.50. With the stochastic indicator losing positive momentum, there is an anticipation of the pair resuming its downward trajectory to test the 144.47 level, which is identified as the next primary target.

The bearish outlook is reinforced by the negative pressure exerted by the EMA50, with the pair needing to remain below 146.17 to sustain the expected decline. The trading range for today is projected between 144.70 support and 146.20 resistance, with the trend expected to be bearish.

USD/JPY Live Chart