The JPY recovered on Monday after last week’s heavy losses, but the prospect of the Bank of Japan (BoJ) not exiting its ultra-loose monetary policy in January could limit any further gains. On the other hand, higher US bond yields have lent support to the USD/JPY.
The safe haven Japanese yen attracted investors on Monday and pushed the USD/JPY pair lower and away from the more than three-week high it reached on Friday. China’s economic problems and geopolitical risks influenced investor sentiment and supported the safe-haven Japanese currency.
However, any further gains for the yen remain limited due to the fact that the BoJ will likely retain its negative interest rates policy at the next meeting on the 22-23 of January after the New Year’s Day earthquake in Japan.
The USD failed to recover further as the market expects the Fed to begin cutting interest rates as early as March.
On the other hand, the Fed may have the potential to keep rates higher for longer since US economic data remained robust and showed that the economy remains resilient. The strong December US jobs report lifted the USD/JPY pair to a three-week high on Friday. The upbeat data has forced investors to limit bets for more aggressive easing by the Federal Reserve.
Additionally, hawkish commentary from Fed officials supports higher US Treasury bond yields which is also helping the USD/JPY pair. Dallas Fed President Lorie Logan warned that unless the US central bank keeps sufficiently tight financial conditions, inflation may rise and reverse all the progress that has been achieved till now. Logan’s comments follow those of Richmond Fed President Thomas Barkin who noted last week that rate hikes remained on the table.
Nonetheless, markets expect the first interest rate cut to take place at the Fed’s March policy meeting with an additional five 25 basis points (bps) rate cuts for the rest of 2024. This has weighed on the greenback. In the meantime, investors will turn their focus on the US consumer inflation figures on Thursday.
Japan’s Tokyo CPI rates in tomorrow’s session
On the 4th of December 2023, Japan’s Tokyo Consumer Price Index (CPI) print showed that price growth had eased back in November, with the headline CPI print falling to 2.6% for the annualised period into November compared to October’s 3.3% print. November’s annualised Tokyo Core CPI (excluding fresh food price volatility) also fell slightly faster than markets expected coming in at 2.3% versus the 2.4% forecast.
The latest CPI readings from Japan for December will be due out on Tuesday, 9th of January Asia time (23:30 GMT, 8th of January and 18:30 US Eastern time, 8th of Jan., Monday evening).
Analysts expect a further moderation in inflation, but core inflation (excluding food) is expected to remain above the 2% target, only by 0.1%.
The Bank of Japan will closely watch these readings in order to see whether there is any increase in domestic price pressures which may suggest the need for some degree of policy tightening. However, market participants argue that the odds for a monetary policy tightening move at the January meeting may be very slim as more economic data may be necessary to support such a move.