On Friday, the yen got stronger. The USD/JPY currency pair fell through important support today, last trading at 143.63, down 0.37% on the day. This recent movement in the currency pair illustrates some important factors. A surprising inflation report from Tokyo and continued uncertainty about U.S. trade policies with the reign of former President Donald Trump are pushing this trend. The markets are making their bets according to these important developments. Going forward, analysts are particularly focused on important USD/JPY resistance and support levels that could shape the pair’s path ahead.
Not entirely surprising, recent data Tokyo’s core Consumer Price Index (CPI) — which excludes fresh foods — jumped to 3.6% year-on-year in May. It was a sharp increase over last month’s 3.4% and the market projection of 3.5%. This increase was largely due to a jump in non-fresh food prices, which fueled this increase. One example of this exacerbation is how rice prices have increased by 93% in the last year. Consequently, bets on when the Bank of Japan (BoJ) would raise interest rates next increased sharply.
Market Reactions to Inflation Data
These upside surprises to inflation should weigh on BoJ’s policy deliberations in the period ahead. Tokyo’s core inflation is a leading indicator for inflation trends nationwide, so the central bank watches it extremely closely. Given the recent economic backdrop, any truly positive inflation report would likely result in a sooner-than-expected rate hike. Aside from what it implies for the outlook of USD/JPY, this would be a major shift.
Market structure suggests that within the current trading environment, USD/JPY has faced potential resistance at 144.23 USD/JPY and 144.42 USD/JPY. Our most recent trading indicates that it has broken through the 143.98 and 143.79 support levels. This could be a sign of emerging potential dollar weakness against the yen. Traders are increasingly eyeing thin support at 143.54, just below today’s crumbling support. They are eyeing 143.35 since it could be a key pivot point in the days ahead.
Impact of U.S. Trade Policies
The economic considerations are further muddied by the unknown status of U.S. trade policies. Tweet President Trump’s start has already sent USD/JPY on a wild ride, increasing markets’ uncertainty. A trade court panel recently ruled that many of Trump’s tariffs were illegal, creating further uncertainty about their future enforcement. Soon after, an appeals court issued a temporary stay on this ruling, permitting the tariffs to stay in effect for the time being.
Yet this legal challenge has cut a large swath of unpredictability into financial markets. The tariffs have unleashed uncertainty in U.S.-Japan trade relations, creating a climate of fears regarding the tariffs’ effects on Japan’s economy. Most analysts expect the Bank of Japan to delay increasing rates for the time being. They would like more transparency on domestic economic impacts of tariffs.
The Road Ahead for USD/JPY
As market participants digest these developments, they are carefully monitoring how inflation data and trade policies will shape monetary policy in Japan and the United States. Potentially negative impacts from U.S. tariffs would lead the Bank of Japan to exercise greater caution in raising interest rates. On one hand, evident inflationary pressures would lead U.S. monetary policymakers to act sooner.
USD/JPY, for instance, faces a particularly tricky environment with inflation swinging in both directions and trade policy uncertain at best. It’ll be a make-or-break few weeks ahead for investors. They’ll consider how these new developments are affecting currency valuations.