In the thin trading conditions ahead of the New Year holiday on Monday, the Japanese Yen (JPY) maintains its footing against the US Dollar (USD). Market sentiment, buoyed by last week’s Tokyo Consumer Price Index (CPI) inflation data, has led traders to anticipate an interest rate hike from the Bank of Japan (BoJ) in January, lending support to the yen.
Japan’s Jibun Bank Manufacturing PMI for December came in at 49.6, edging past the expected 49.5 and showing an improvement from November’s 49.0. Despite this being the highest since September, it still signals six straight months of factory activity decline. The Nikkei 225 dipped to around 39,950 on Monday, halting a two-day rally, as US futures slid slightly following Friday’s Wall Street slump, which was spurred by rising Treasury yields and the Fed’s indication of more limited interest rate cuts in 2025.
The US Dollar Index (DXY), gauging the dollar against six major peers, hovers around 108.00. The greenback is facing headwinds as US Treasury bond yields fall on Monday, with 2-year and 10-year yields at 4.30% and 4.59% respectively at the time of writing. While the dollar could draw support from expectations of fewer Fed rate cuts next year, traders are still processing the Fed’s hawkish pivot last month, where it made a quarter-point cut but signaled only two rate cuts for 2025.
Tokyo CPI figures show a year-on-year rise. The headline inflation hit 3.0% in December, up from 2.6% in November. Excluding fresh food and energy, the CPI climbed to 2.4% YoY, and excluding just fresh food, it reached 2.4% YoY, slightly below expectations but higher than the prior month. Japan’s Finance Minister Katsunobu Kato on Friday noted one-sided and sharp foreign exchange moves and vowed to take appropriate action against excessive FX fluctuations.
The BoJ’s December meeting summary, released on Friday, flagged plans to tweak easing measures if economic conditions meet expectations. Its October meeting minutes, out this Tuesday, repeated the possibility of gradual rate hikes if inflation trends cooperate, aiming for 1% inflation by late fiscal 2025. BoJ Governor Kazuo Ueda also said the central bank expects the Japanese economy to inch closer to the 2% inflation target next year.
Technical Analysis: USD/JPY in a Subdued Uptrend
On Monday, the USD/JPY pair trades near 157.80, keeping its bullish impetus within an ascending channel on the daily chart. The 14-day Relative Strength Index (RSI) lingers just below 70, affirming the bullish trend. Should the RSI cross 70, it could point to an overbought state, possibly triggering a downward correction.
Upwardly, the pair may revisit its December 26 monthly high of 158.08. A clear break above this level could open the door for more gains, with the target being the upper boundary of the ascending channel near 160.60. Immediate support is found at the nine-day Exponential Moving Average (EMA) around 156.79, which aligns closely with the lower boundary of the ascending channel near 156.50.
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