The Japanese Yen ( JPY) ripped after Tokyo printed its own inflation data. This report, as we explained last week, showed a jump in the CPI, which amplified the Yen’s rally. The US central bank today cut its benchmark overnight borrowing rate by a quarter percentage point, marking the second reduction this year. This rule has had tremendous impact on market conditions. This change has opened a new pandora’s box of factors impacting the JPY’s strength and traders’ sentiments.
In October, Tokyo’s CPI increased to a year-on-year rate of 2.8%, up from 2.5% in September. Upward pressure on inflation is increasing, an indication that this could become a deeper, more systemic issue. The Bank’s hard core gauge, which strips out fresh food prices, accelerated to 2.8% from 2.5%. Given that the Tokyo CPI is viewed as a leading indicator for Japan’s overall inflation, these figures have implications for monetary policy and the Bank of Japan’s (BoJ) interest rate decisions.
The BoJ has been under increasing pressure to raise or ease its aggressive policy stance in line with Japan’s inflationary rise. In normal times, higher inflation readings would tend to strengthen the JPY. Conversely, a string of lower readings can contribute to a drop in its value. Recent economic data contributed to growing expectations of an imminent rate increase by the BoJ. The change would have the effect of reinforcing the currency even more. The short-term technical picture for the USD/JPY has drastically changed. As a result, the overnight breakthrough of the 153.25-153.30 zone has developed into a strong catalyst for bullish momentum.
Despite the positive sentiment around the JPY, analysts helpfully warn us not to get excessively optimistic. Further, oscillators on the daily chart are still in positive territory but have not reached the overbought threshold. Should selling push lower, below 152.00, that might mean a change in momentum. This could cause the duo to trade even larger declines, aiming for the 151.55-151.50 level before hitting key support around 151.10-151.00.
The new wave of economic anxieties is due to the US government shutdown, now in its fifth week. A standoff among political leaders over future funding legislation has added insult to injury. Traders have responded to this confusion by pulling forward the timing of Fed easing, now expecting the central bank to start cutting rates in early 2024. Consequently, the value of the USD has increased dramatically against other currencies, including the JPY.
Traders wasted no time reacting to the pivots to cut their bets for further easing this year. This shockwave sent the USD to its highest levels since early August. Consequently, the USD/JPY currency pair hit a three-month high. Market watchers note that in case the price drops below the 154.00 level, it should be supported close to the 153.30-153.25 area. This funding would limit any continued drop.
Japan will get in on the action with incoming Prime Minister, Sanae Takaichi, a pro-stimulus leadership. This makes the complicated implementation process that much more challenging. If so, her approach ensures the BoJ remains committed to its present monetary policy for a longer duration than we projected. This may pose hurdles for the JPY to strengthen.