The Japanese Yen (JPY) showed resilience during the Asian trading session on Wednesday, buoyed by an unexpected increase in Japan’s Corporate Goods Price Index, which sparked renewed optimism for a potential interest rate hike by the Bank of Japan (BoJ). This comes at a time when expectations surrounding the US Federal Reserve (Fed) reveal a more dovish outlook, leading to a decline in the US Dollar (USD) and providing support for the lower-yielding yen.
The JPY’s recent rebound is notable as it breaks a three-day losing streak, recovering from a two-week low reached on Tuesday. Despite this uptick, market participants remain cautious, with ongoing concerns about Japan’s fiscal measures and broader economic growth casting shadows on the yen’s prospects. Many investors appear to be awaiting the outcomes of a crucial two-day Federal Open Market Committee (FOMC) meeting, anticipated to deliver further insights into the Fed’s direction concerning interest rates.
The latest data from the BoJ indicated a 2.7% year-on-year rise in the Corporate Goods Price Index for October, a slight decline from 2.8% the previous month but still above historical norms. This data has reinforced speculation about the possibility of further policy normalization by the BoJ. Governor Kazuo Ueda stated that the likelihood of the central bank’s economic and price outlook materializing is increasingly probable, lending additional support to the yen.
Adding further complexity to the economic landscape, Prime Minister Sanae Takaichi’s ambitious spending plans to invigorate Japan’s economy have resulted in the yield on the benchmark 10-year Japanese government bond reaching an 18-year high. Meanwhile, the revised Gross Domestic Product figures indicated a contraction of 0.6% in the third quarter, worse than the initial estimate of 0.4%. On an annual basis, the economy registered a contraction of 2.3%, marking its fastest decline since the third quarter of 2023.
Traders are currently pricing in a strong probability, exceeding 75%, that the BoJ will raise interest rates during its upcoming policy meeting on December 18-19. This contrasts sharply with expectations for further easing from the US Federal Reserve, which is anticipated to announce a 25 basis points reduction in borrowing costs at the conclusion of its meeting.
As the market closely monitors the Fed’s economic projections and statements from Chair Jerome Powell during a post-meeting press conference, the implications for the USD/JPY currency pair are significant. Analysts suggest that the direction of this pairing may hinge on the resulting commentary and policy direction from both the Fed and the BoJ in the near term.
In technical analysis, the USD/JPY’s recent breakout exceeding the 155.30 resistance level, which includes the 100-hour Simple Moving Average, has sparked bullish sentiment. Indicators on both hourly and daily charts remain in favorable territory, suggesting potential for continued upward movement. A sustained rally above the 157.00 mark could lead to further gains, targeting the 157.45 hurdle and possibly extending towards the 158.00 multi-month peak recorded in November.
Conversely, should the USD/JPY approach the 156.00 mark, it could represent a viable buying opportunity. The support created at the 155.30-155.35 region may help cushion any declines. However, a movement below the psychological barrier of 155.00 could shift momentum decidedly in favor of bearish traders, questioning the recent positive outlook for the currency pair.
