The Japanese yen has shown significant strength, buoyed by positive data regarding Core Machinery Orders in Japan and increasing expectations of a near-term interest rate hike by the Bank of Japan (BoJ). Following a slight decline during the Asian trading session, the Yen attracted buyers after its recent decrease from a nearly four-week high against the US Dollar.
Core Machinery Orders in Japan rose by 3.4% month-on-month in November, marking the second consecutive month of growth and the highest increase in nine months. This data is indicative of a rebound in capital expenditure and is seen as a sign of strengthening economic activity. Expectations of a possible BoJ rate hike later in the week also contributed to the Yen’s upward momentum, particularly in light of a softer US Dollar.
Although the Federal Reserve has indicated a pause in its rate-cutting cycle, emerging signs of declining inflation in the United States may position the central bank to consider further cuts in 2025. This scenario has led to a reduction in US Treasury bond yields, which, coupled with a narrowing yield differential between the US and Japan, has provided additional support for the Yen. However, uncertainty surrounding the incoming US administration’s trade policies may temper bullish sentiment regarding the Yen ahead of the BoJ’s policy meeting.
The BoJ’s discussions of a potential rate hike come as wage growth gains traction across various sectors in Japan. Statements from BoJ officials emphasize a willingness to adjust interest rates should economic indicators continue to improve. As the market anticipates these developments, traders may adopt a cautious stance leading up to significant policy announcements.
Recent US economic data revealed a mixed picture, with housing starts climbing 3.3% in December, despite a decrease in building permits. This fluctuation underscores the complex economic landscape as both US and Japanese monetary policies converge, influencing market dynamics in the USD/JPY currency pair. In the technical realm, the USD/JPY pair may face resistance around the 156.55 – 156.60 range, with the potential for retracement towards lower levels should it break below key support around 155.25.
