The USD/JPY currency pair experienced a decline following a brief surge to around 158.00, marking a five-month high. This retreat was driven by stronger-than-expected inflation data from Japan alongside a prevailing risk-off sentiment and declining US bond yields, which favored the lower-yielding Japanese Yen (JPY). With the divergence in monetary policy outlook between the Federal Reserve and the Bank of Japan (BoJ), it is anticipated that losses for USD/JPY will remain limited ahead of the upcoming US Personal Consumption Expenditure (PCE) Price Index release.
As investors digested a monetary policy update from the BoJ, the National Consumer Price Index (CPI) data revealed a notable rise of 2.9% year-on-year for November, surpassing the previous month’s reading of 2.3%. Additionally, the CPI, excluding fresh food, increased from 2.3% in October to 2.7%. This persistent inflation uptick raises the possibility of a rate hike by the BoJ in early 2025, providing some support for the JPY. The ongoing global market reluctance, due to concerns over a potential US government shutdown and geopolitical tensions, has seen a shift toward safe-haven assets, further compressing the USD/JPY pair, pushing it below the 157.00 level as the week concludes.
Amidst these developments, the US House of Representatives’ failure to advance a spending bill has heightened fears of a partial government shutdown, influencing investor sentiment. The resulting flight to safety has led to a pullback in US Treasury yields, slightly curbing the recent USD rally from a two-year peak. However, with the Fed maintaining a hawkish stance, significant losses for the USD remain unlikely.
Market players are likely to adopt a cautious approach ahead of the PCE Price Index report, as this key inflation measure could impact the USD’s strength. Despite the current pullback, the underlying trends suggest potential for continued upward movement in the USD/JPY pair, particularly if it successfully breaks through resistance levels above 157.50 towards 158.00.
