Japanese yen drifting ahead of BOJ Core CPI

In Monday’s European session, USD/JPY is steady, trading at 137.90. The yen gained 0.53% on Friday, after a nasty slide last week in which it fell 440 points and hit a six-month low.

BoJ Core CPI expected to inch lower

Inflation has become a hot topic for Japanese policy makers, which marks a sea-change after years of deflation. Japan is dealing with inflation of around 3%, which is much lower than in other major economies but nevertheless higher than the Bank of Japan’s 2% target.

The new inflationary era has forced central banks to raise interest rates, but the BoJ remains an outlier as it has continued its ultra-loose monetary policy. Still, it appears that change is coming. There is a new sheriff in town, with Kazuo Ueda now at the helm of the BoJ. Ueda has said he would tighten policy if inflation remains sustainable at 2%, which makes every inflation reading a potential market-mover. Last week, core CPI rose to 3.4% in April, up from 3.1% a month earlier. The rise in inflation, together with a stronger-than-expected GDP report for the first quarter, has fuelled speculation that the BoJ could tighten policy in the near future.

The markets will be closely watching BoJ Core CPI, the BoJ’s preferred inflation gauge, which will be released early on Tuesday. The estimate for March stands at 2.8%, a drop lower than the 2.9% reading in February.

We’re unlikely to see interest rates rise anytime soon, but Ueda has hinted at phasing out the Bank’s yield curve control (YCC) policy. Such a move would likely send the yen sharply higher, and unsurprisingly, the possibility that the BoJ will tighten policy has attracted the attention of speculators, who are betting on a shift in policy that will boost the yen.

USD/JPY technical

• In the Asian session, USD/JPY put strong pressure on support at 137.45. Below, there is support at 1.3615.

• There is resistance at 138.37 and 139.25.