The USD/JPY exchange rate drifted downwards after the relatively strong Japanese inflation data and the Bank of Japan (BoJ) interest rate decision. The pair retreated to 155.90, down from this year’s high of 158.90. So, what next for the Japanese yen ahead of the Fed decision?
BoJ interest rate hike
The USD/JPY pair dropped after the Japanese statistics agency published strong consumer inflation data. The headline Consumer Price Index (CPI) rose from 0.4% in November to 0.6% in December.
This growth translated to a year-on-year gain of 3.6%, up from the previous month’s 2.9%. The closely-watched core inflation, which excludes the volatile food and energy prices, rose from 2.7% to 3.0%.
These numbers mean that Japan is now having higher inflation than other countries, a situation that was unheard of a few years ago. For example, the US headline CPI rose from 2.7% in November to 2.9% in December.
The BoJ decided to hike interest rates again from 0.25% to 0.5%, the highest level since 2008. It also hinted that it will continue hiking interest rates if inflation remains elevated for a while.
The USD/JPY also reacted to the flash manufacturing and services PMI data. According to S&P Global and au Jibun Bank, the services sector did well in January, with the PMI rising from 50.9 to 52.7. The manufacturing sector, however, crashed from 49.6 to 48.8.
Higher interest rates risks hitting the manufacturing sector hard, especially now that it is going through a challenging period. The main concern is that China has now become a leading vehicle exporter, with firms like BYD, Nio, and Xpeng gaining market share.
Federal Reserve decision ahead
The next key catalyst for the USD/JPY exchange rate will be the upcoming Federal Reserve interest rate decision scheduled on Wednesday next week.
This will be an important meeting because it will set the tone for what to expect this year. Economists expect the bank to leave interest rates unchanged now that it has embraced a more hawkish tone.
The bank will then signal that it will hold rates steady for a while as it observes inflation trends. Recent data showed that the headline consumer inflation rose from 2.7% to 2.9% in December, while core inflation fell from 3.3% to 3.2%.
Another report showed that the labor market did well as the unemployment rate improved from 4.2% tp 4.1%
Experts expect the Fed will cut interest rates again in July if inflation moves closer to its target of 2.0%.
USD/JPY technical analysis
USD/JPY price chart by TradingView
The daily chart shows that the USD to JPY exchange rate peaked at 158.90 on January 10 and then pulled back to the current 155.80. It has formed a small bearish pennant pattern in the past few weeks.
The pair has found substantial support at the 50-day moving average. It has also moved above the ascending trendline that connects the lowest swings since September 16.
Therefore, the pair will likely continue falling as the BoJ and Fed divergence continues. This view will be confirmed if it drops below the 50-day moving average and the ascending trendline. If this happens, the next point to watch will be at 154.
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