The dollar was up 0.6% against the yen at 155.09 yen, following the BOJ Governor Kazuo Ueda repeating a gradual approach to rate hikes. While Ueda kept the door open for further increases, he did not confirm there would be another rate hike in December. This cautious stance, with strength in U.S. Treasury yields and intervention concerns, has increased uncertainty and volatility within the market in the USD/JPY pairing.
BOJ Rate Hike Speculations Remain Murky
BOJ Governor Kazuo Ueda reaffirmed the gradual monetary policy tightening stance of the central bank, transparently pointing out that rate hikes are "premised on favorable economic conditions and trends of inflation consistent with the BOJ forecast." But in this, Ueda didn't pledge to a December rate hike. He mentioned that the risks to both domestic and world economic stability have to be carefully judged. This ambiguity has split the market, pricing in a 54% chance of a quarter-point hike at the BOJ's December 19 policy decision-the estimate hasn't budged from previous ones.
There have been a few aspects acting in tandem that are influencing the BOJ's thinking:
Japan's economic recovery is still on a moderate bias, reflecting mixed signals of growth.
Inflation patterns had been a key driver, and fresh CPI data is due this week.
Global risks-high U.S. economic resilience and geopolitical tension-weigh heavy on the policy decisions.
Ueda's cautious tone comes as the BOJ tries to avoid taking action too prematurely that could crush Japan's recovery, or even upset global market stability.
Dollar Gains Momentum Amid Strong Treasury Yields
Strong U.S. Treasury yields and inflation expectations driven by proposed fiscal policies from the Trump administration bolstered the dollar's gains against the yen.
Surging U.S. Treasury Yields:
That yields on 10-year Treasury bonds surged 70 basis points in October speaks volumes for investors' confidence in the resilient performance of the U.S. economy. This strength of yield would widen the dollar's attractiveness against lower-yielding currencies such as the yen.
Trump's Economic Policies:
Federal Reserve won't be able to pursue aggressive interest-rate cuts amid promised tariffs and tax cuts by President-elect Donald Trump that are likely to spur inflation. Markets now expect a 60% chance of a quarter-point rate cut in December, down from 77% earlier.
Federal Reserve Outlook:
Fed Chair Jerome Powell and other officials have indicated cautious optimism for the US economy, emphasizing balanced growth and a strong labor market. This positions the dollar to keep rising, given the limited scope for monetary easing.
Weak Yen and Japan's FX Intervention Risks
The yen has suffered sharply from depreciation pressures, with Japanese authorities warning of intervention. The finance minister, Katsunobu Kato, put the market on red alert last Friday with his comments regarding the government being vigilant against excessive currency movements.
Despite such intervention warnings, the yen is weak and remains vulnerable:
Intervention risks have temporally dampened the yen's depreciation but failed to reverse the trend.
The perceived safe haven status of the yen has weakened, with geopolitical risks like the Ukraine conflict seen boosting demand for dollars.
Delays by the BOJ or weaker-than-anticipated inflation data could lead to further yen losses and increase the risks of intervention.
Technical Perspective: USD/JPY Levels of Support and Resistance
The USD/JPY pair reveals impressive upward momentum. Key technical levels support this rise in the following manner:
Resistance Levels: 155.70 and 156.00 are nearby constraints on further advances. The first resistance level is at 153.85, followed by 153.25 and 153.00. The positive oscillators suggest the scope for further appreciation, but psychology above the 155.00 level would be needed to confirm that the pair had continued to hold a bullish bias.
Cyclical Market Patterns-What to Look for this Week The USD/JPY direction this week will be the influence of several external and internal drivers: the following U.S. Economic Data:
Flash November PMI reports for manufacturing and services. Housing starts and existing home sales. Japanese Economic Indicators: CPI data for October will be important for assessing the inflation outlook and the BOJ policy trajectory. Policy Developments: Larger-than-usual speculations on rate hikes make the BOJ's December policy meeting a date to keep. President-elect Trump is expected to name his pick for Treasury Secretary, which should give further indication of his future economic priorities. These events will set market tone and influence the volatility in currency pairs, especially USD/JPY.
Conclusion
A cautious BOJ on rate hikes, combined with strong U.S. Treasury yields and inflation expectations, has propelled the dollar higher against the yen. But intervention risks and upcoming Japanese CPI data add layers of complexity to the outlook. With traders waiting for clarity from both the BOJ and the Fed, the USD/JPY is likely to remain volatile, with broader market trends and geopolitical developments playing critical roles.
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