Japanese Yen bears retain control; USD/JPY nears 159.00 ahead of US CPI report
- Japanese Yen attracts heavy follow-through selling amid a combination of negative factors.
- BoJ uncertainty, Japan-China rift, and talks of a snap election in Japan undermined the JPY.
- A modest USD uptick further supports USD/JPY, though intervention fears warrant caution.
The Japanese Yen (JPY) maintains its heavily offered tone through the early European session and hangs near its lowest level since July 2024, touched against a firmer US Dollar (USD) this Tuesday. Reports that Prime Minister Sanae Takaichi may soon call a snap election to take advantage of strong approval ratings fueled hopes for more expansionary fiscal policy. This comes on top of the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ), which, along with deepening Japan–China diplomatic crisis, and a positive risk tone, continue to undermine the safe-haven JPY.
Meanwhile, the recent JPY decline might prompt some verbal intervention from Japanese authorities, which, in turn, warrants some caution before placing fresh bets. The USD, on the other hand, might struggle to attract follow-through buying amid worries about the US Federal Reserve's (Fed) independence, and further cap gains for the USD/JPY pair. Investors might also opt to wait for the release of the US consumer inflation figures, due later today, for more cues about the Fed's rate-cut path. The data will influence the near-term USD price dynamics and provide a fresh impetus to the currency pair.
Japanese Yen seems vulnerable as political risks add to BoJ uncertainty
- Reports suggest that Japan's Prime Minister Sanae Takaichi may call an early election in the first half of February to bolster her coalition government’s parliamentary majority, fueling hopes for additional stimulus.
- Last week, China prohibited some rare earth elements from being exported to Japan with immediate effect. The ban follows a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers.
- Despite the Bank of Japan's (BoJ) hawkish outlook, investors remain uncertain about the likely timing of the next rate hike. This, along with the risk-on impulse, is seen undermining demand for the safe-haven Japanese Yen.
- Japan’s Finance Minister Satsuki Katayama said this Tuesday that she shared concerns over the JPY's recent one-sided decline with US Treasury Secretary Scott Bessent and added that the tolerance for weakness was limited.
- Concerns about the Federal Reserve's independence resurfaced on Monday after prosecutors opened a criminal investigation against Jerome Powell over his testimony about the central bank building renovation project.
- Powell, in a rate statement, called the probe unprecedented and said that he believed it was opened due to US President Donald Trump's anger over the Fed's refusal to cut interest rates despite repeated public pressure.
- This keeps the US Dollar bulls on the defensive despite firming expectations for a less aggressive monetary policy easing by the US central bank this year, bolstered by the latest monthly employment details released last Friday.
- Traders are pricing in the possibility of two more rate cuts by the Fed in 2026. This marks a significant divergence compared to expectations that the BoJ will stick to its policy normalization path and should cap the USD/JPY pair.
- BoJ Governor Kazuo Ueda reiterated last week that the central bank would continue to raise interest rates if economic and price developments move in line with forecasts, leaving the door open for further policy tightening.
- Investors might also refrain from placing aggressive directional bets and opt to wait for more cues about the Fed's rate-cut path. Hence, the focus will remain glued to the release of the latest US consumer inflation figures.
USD/JPY bulls have the upper hand amid a breakout through 158.00
The 50-day Simple Moving Average (SMA) continues to rise, with the USD/JPY pair holding above it, reinforcing a firm bullish bias. The SMA, around the 156.00 mark, offers nearby dynamic support as buyers retain control. The Moving Average Convergence Divergence (MACD) shows a bullish crossover near the zero line, with the histogram turning positive and momentum improving.
The Relative Strength Index (RSI) stands at 67.47, strong but not overbought, supporting the upside while leaving room before stretched conditions emerge. As long as USD/JPY holds above its rising SMA, pullbacks would remain contained, and the pair could extend higher; a close back below the average would hint at waning momentum and a move into consolidation.
(The technical analysis of this story was written with the help of an AI tool.)
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
