The recent economic developments in Japan have raised expectations regarding the Bank of Japan's (BoJ) monetary policy adjustments.
The consumer price index (CPI) data for October showed an annual inflation rate of 2.3%, slightly lower than the previous month's 2.4% but higher than the expected 2.2%. This unexpected resilience in inflation has led to a growing consensus among economists that the BoJ may raise rates in December.
A Reuters poll conducted between November 13 and 21 indicated that 56% of economists now predict a rate hike, up from 49% the previous month. Market sentiment also reflects this shift, with derivatives pricing suggesting a 76% probability of a 25 basis point hike at the upcoming BoJ meeting. This change in expectations could strengthen the Japanese yen, especially as the likelihood of monetary tightening becomes more certain.
The USD/JPY exchange rate has been increasing since mid-September, reaching a four-month high around 155. However, analysts believe that a pullback may be imminent due to domestic and international factors. One significant factor is the speculation about a possible rate cut by the Federal Reserve in December. The implied probability of a Fed rate cut is currently around 60%, reflecting uncertainty in the U.S. economic outlook.
The upcoming U.S. employment data, scheduled for release on December 6, will play a crucial role in shaping the Fed's decision-making process. If the data reveals disappointing trends, such as a larger-than-expected decline in job creation or an increase in the unemployment rate, it could intensify speculation about Fed easing. This would likely put downward pressure on the U.S. dollar, influencing the USD/JPY exchange rate.
From a technical perspective, the USD/JPY has been consistently increasing, but recent stabilization around the 155 level suggests a potential change in market dynamics. Traders are advised to watch for bearish signals, particularly a dip below the 20-day moving average, which could indicate a retracement. Key support levels to monitor include the pivot at 152 and the psychological threshold at 150. A significant drop to the September lows around 140 is unlikely in the near term unless there is a notable acceleration in global economic activity.
The interaction between Japanese monetary policy and U.S. economic indicators will be crucial in determining the future direction of the USD/JPY exchange rate. As market participants assess the implications of potential rate changes from both the BoJ and the Fed, the currency pair is expected to remain volatile, reflecting the broader economic landscape. It is important to stay informed about macroeconomic trends and their potential impact on currency markets.