USD/JPY has pulled back from a three-month high following a surprising rise in Japan’s October Producer Price Index (PPI), which lifted the Japanese Yen (JPY). The increase in Japanese factory-gate inflation could eventually influence consumer prices, prompting speculation that the Bank of Japan (BoJ) may consider raising interest rates sooner. Higher interest rates often strengthen a currency by attracting more foreign capital.
Key Drivers:
- Japanese Producer Price Index (PPI) Data:
- October’s PPI rose by 3.4% year-over-year, beating the 3.0% forecast. This higher-than-expected inflation data from the producer side increases the likelihood of consumer inflation rising, putting potential pressure on the BoJ to tighten its ultra-loose monetary policy.
- BoJ meeting minutes released Sunday highlighted a split among policymakers on rate hike timing, but Governor Katsuo Ueda has indicated a willingness to raise rates if data aligns with forecasts. The central bank maintains its benchmark policy rate could reach 1.0% by the latter half of 2025.
- US Dollar Strength and Inflation Data:
- The USD remains buoyed by October CPI data showing inflation pressures in line with expectations. Headline CPI rose 2.6% year-over-year, and Core CPI remained steady at 3.3%. This stubborn inflation might limit any rapid Fed rate cuts, supporting the USD and consequently the USD/JPY pair.
- With a roughly 80% probability for a 25 bps rate cut by the Fed in December, according to the CME FedWatch Tool, markets are closely watching for further inflationary signals that may influence Fed policy, especially as President-elect Donald Trump’s policy agenda is expected to spur inflation.
- US Dollar Upside Bias from Market Sentiment:
- USD/JPY remains in a short- and medium-term uptrend amid a stronger USD and anticipated economic policies under Trump that may support inflation. These expectations are keeping the USD supported despite any pullback.
Technical Analysis:
USD/JPY continues to maintain an uptrend on multiple timeframes, despite the recent dip due to JPY strength.
- Resistance Levels: A break above recent highs around 150.70 could pave the way for further upside, with the next resistance near 151.50.
- Support Levels: Immediate support lies near 149.50, and a more significant support level is around 148.80. A break below 148.80 could indicate a deeper pullback.
Outlook:
USD/JPY’s overall uptrend remains intact due to the ongoing strength of the USD. However, stronger-than-expected inflationary data from Japan could increase BoJ’s policy shift expectations, offering the Yen support. For now, USD/JPY remains supported by the broader strength of the Dollar but could see increased volatility with any shifts in BoJ or Fed policy expectations.
