The Japanese Yen (JPY) remains under pressure against the US Dollar (USD) during Monday’s European session, trading with a negative bias. Lingering doubts over the Bank of Japan’s (BoJ) rate hike timeline, coupled with widening US-Japan yield differentials, weigh on the JPY despite support from strong domestic inflation data.
BoJ Policy Uncertainty and Market Reaction
The BoJ’s recent decision to leave interest rates unchanged and Governor Kazuo Ueda’s cautious tone on tightening have fueled skepticism about the central bank’s plans. While Friday’s inflation report showed Japan’s National Consumer Price Index (CPI) rising more than expected in November, which supports potential rate hikes in early 2025, immediate actions remain uncertain.
Japanese government bond yields dropped to their lowest in a month after dovish signals from the BoJ, further undermining the JPY. Meanwhile, US bond yields rose to multi-month highs, amplifying the yield differential and exerting additional pressure on the lower-yielding JPY.
US Dollar Gains Support from Fed’s Hawkish Stance
The USD continues to draw strength from the Federal Reserve’s (Fed) hawkish approach. While the Fed cut rates by 25 basis points recently, its signal of a slower pace of future cuts underlines concerns about persistent inflation. This has maintained elevated US Treasury yields, making the USD an attractive investment and weighing on the JPY.
Friday’s US Personal Consumption Expenditure (PCE) Price Index indicated moderated inflation, with core PCE rising 2.8% year-over-year in November, below the 2.9% market expectation. However, the report reinforced confidence in the USD amid lingering economic uncertainties.
Geopolitical Risks and Safe-Haven Flows
Geopolitical tensions, particularly in the Middle East, provide some underlying support to the safe-haven JPY. However, a generally positive risk tone in markets has limited its impact, keeping the USD/JPY pair elevated.
Technical Outlook for USD/JPY
Support Levels: Immediate support lies at 156.00–155.95, with a break below targeting 155.50. Further losses could expose the 155.00 psychological mark.
Resistance Levels: The 157.00 round figure serves as the immediate hurdle, followed by 157.40–157.45. A sustained move above 158.00 could trigger further gains toward 158.45 and potentially 159.00.
Key Events to Watch
Investors await the release of the US Consumer Confidence Index and the Chicago Fed National Activity Index for short-term trading cues. Durable Goods Orders on Tuesday will also be closely monitored for their potential impact on the USD/JPY pair.
The USD/JPY pair remains poised for further upside, driven by the Fed’s hawkish stance and the widening yield gap between the US and Japan. While geopolitical risks and strong Japanese inflation data provide intermittent support to the JPY, uncertainty over the BoJ’s rate hike plans keeps the currency vulnerable. Traders should keep an eye on key support and resistance levels as well as upcoming US economic data for directional cues.
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