Japanese yen at 5-week high

After gaining ground over three straight sessions, the Japanese yen has paused on Monday, as it trades around 113.80.

Markets eye BoJ inflation gauge

Inflation indicators continue to garner attention in Japan, which is showing inflationary pressures after years of deflation. December core CPI climbed 0.5% y/y, just shy of the 0.6% forecast. Inflation is being driven by higher fuel costs and a weak yen, but a 53% reduction in mobile phone fees in December curbed the CPI gain. If the mobile phone fees are taken out of the equation, core CPI rose close to 2%, which is the BoJ’s inflation target. On Tuesday, Japan releases BoJ Core CPI, the bank’s preferred inflation indicator.

The central bank is following closely the rise in inflation, with the BoJ minutes from the December meeting indicating that members discussed the increase in CPI due to the rise in producer prices. The uptrend is inflation is a new development in Japan, but the bank is unlikely to shift away from its ultra-accommodative policy or raise rates anytime soon. BoJ Governor Haruhiko Kuroda has said that a rise in inflation that does not include higher wage growth is not sustainable, which sounds very much like the ‘transient inflation’ phrase that Fed Chair Jerome Powell was using until recently.

It’s a busy economic calendar in the US, highlighted by the FOMC meeting on Wednesday. With inflation running at its highest level in almost 40 years, the Fed is under pressure to raise rates and the markets have priced in a 70% likelihood a rate hike in March. The Fed will likely signal that a rate hike is imminent, and the markets have priced in four rate hikes this year. Goldman Sachs sent out a note on Saturday saying that its baseline forecast stands at four hikes, but the surge in inflation could push the Fed to respond with even more rate hikes this year.

There has also been some speculation that the Fed might depart from incremental hikes of 0.25% and announce a 0.50% rise in rates. This would provide a ‘double punch’ of curbing inflation and sending the markets a strong message in order to restore credibility, which has taken a hit from some market participants that feel that the Fed has been too slow in its response to surging inflation.

USD/JPY technical

• There is resistance at 115.54, followed by 116.88.

• There is support at 113.18 and 112.16.