US dollar closes in on 115 yen level

The Japanese yen is unchanged on Tuesday, after starting the week with losses. With USD/JPY currently trading around the 114.80 level, it appears that the 115 line will be breached, perhaps as early as this week. The pair last breached this psychologically-important level a month ago, but was unable to  consolidate above this line.

BOJ inflation gauge beats consensus

Inflation has been at the top of agenda for months for the Federal Reserve and the Bank of England, as inflation remains well above the banks’ two percent inflation target. The “I” word hasn’t caused such alarm in Japan, but it is certainly unusual to be discussing higher inflation levels in Japan, given that the country has had deflation for years.

Inflation has been at the top of agenda for months for the Federal Reserve and the Bank of England, as inflation remains well above the banks’ two percent inflation target. The “I” word hasn’t caused such alarm in Japan, but it is certainly unusual to be discussing higher inflation levels in Japan, given that the country has suffered with deflation for years.

There was further confirmation on Tuesday that inflation is slowly on the rise in the world’s second largest economy. BoJ Core CPI, the bank’s preferred inflation gauge, rose 0.8% in November, its highest level since February 2018. This beat the consensus of 0.5%. The uptick we are seeing in inflation will be welcome news at the Bank of Japan, and should ease policymakers concerns about deflation. The bank’s inflation target of 2% remains a long way off, but inflation could move higher if Omicron does not derail economic activity.

Japan’s economy is expected to expand 6.4% in Q4, after a contraction of -3.6% in the third quarter. However, such robust growth will be highly dependent on the Omicron variant not causing a sharp downturn, which remains a nagging uncertainty. Although Omicron appears to be less severe than Delta, it is much more contagious, and there are fears that hospitals could find themselves overstretched due to a huge influx of unvaccinated persons.

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USD/JPY Technical

• USD/JPY continues to put pressure on resistance at 114.83. Above, there is resistance at 115.26
• There is support at 112.90 and 112.47

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