Japanese yen swings on US inflation

The Japanese yen has shown some strong movement on Tuesday. In the North American session, USD/JPY is trading at 132.85, up 0.32%.

US inflation slows, but less than expected

US inflation in January ticked lower to 6.4%, down from 6.5% but higher than the forecast of 6.2%. It was a similar story for the core rate, which dropped from 5.7% to 5.6%, above the forecast of 5.5%. The markets seemed uncertain how to react and USD/JPY showed sharp swings in both directions before steadying.

The numbers appear to support the Fed’s position that more rate hikes are needed for a longer period than previously expected, which could mean a higher terminal rate than the Fed had previously projected. The markets had continuously questioned this ‘higher and longer’ stance and had priced in rate hikes late in the year. We won’t be hearing much talk of rate cuts until inflation falls at a faster pace. Disinflation, which had pushed the dollar lower in recent months, appears to have lost some steam.

BoJ names Ueda as next governor

After plenty of speculation about the next BoJ governor, it’s official. The BoJ has nominated Kazuo Ueda, which was a surprise choice. When reports surfaced that Ueda was the likely pick, the yen moved briefly moved higher, as the markets viewed the choice as a signal for fresh thinking and a change in policy. Ueda said last week that current policy settings were appropriate and the yen gave back those gains. It’s possible that Ueda was being diplomatic and did not wish to make any waves before he was even nominated.

We may have to wait until he takes over the helm of the BoJ in April before we know his stance on monetary policy. He could decide to abolish the yield control curve (YCC), as he has criticized YCC in the past. This would mean the end of the cap on 10-year bond yields, which the BoJ recently increased from 0.25% to 0.50%, resulting in the yen rising sharply. Will Ueda raise interest rates? That would be a massive shift in policy, and Ueda may prefer to get his feet wet first in his new position as governor before making any dramatic moves.

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USD/JPY Technical

• USD/JPY has support at 131.38 and 130.71
• There is resistance at 132.96 and 134.18

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