Japanese yen extends gains ahead of Fed

The Japanese yen continues to press higher against the US dollar on Wednesday. In the North American session, USD/JPY is trading at 135.08, down 0.38%. Earlier today, USD/JPY fell to 134.51, its lowest level since December 5th.

A tale of two Tankans

The BoJ’s Tankan survey pointed to a mixed picture in the fourth quarter. The Manufacturing index fell to 7, down from 8, as the index slowed for a fourth straight quarter and dropped to its lowest level since Q1 2021. The manufacturing sector continues to be hurt by rising cost pressures and weak global demand. There was much better news from the service sector, as the Services index jumped to 19, up from 14 in Q3 and above the consensus of 17. This marked its best showing since December 2019. The driver for the improvement was the removal of Covid restrictions and the opening of Japan’s borders.

The mixed data highlights the contrast between strong domestic demand post-Covid, coupled with a pessimistic outlook for exports, as fears of a global recession intensify. The Tankan survey also noted a rise in inflation expectations, consistent with the jump in core CPI, which hit 3.6% in November, a 40-year high.

Fed poised to deliver 50 bp hike

The markets are anxiously awaiting the Fed rate announcement later today. This comes on the heels of Tuesday’s dramatic inflation report. Once again, inflation fell and was lower than the consensus. Once again, market exuberance sent equities higher and the US dollar lower on Tuesday, with USD/JPY falling over 2% before paring some of the losses.

The Fed is widely expected to deliver a 50-basis point hike at today’s final meeting of the year. The decline we’re seeing in the recent inflation reports is of course good news, but at the same time, inflation remains more than three times the Fed’s target of 2%. The markets will be looking for hints regarding Fed policy for early 2023 – will Powell & Co. continue to drum out a hawkish message, or will they acknowledge that the current tightening cycle has largely done the job and show a dovish stance? The market response will depend a great deal on the tone of the rate statement and Powell’s follow-up remarks.

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USD/JPY Technical

• USD/JPY broke below support at 134.53 earlier. This is followed by support at 132.48
• There is resistance at 136.20 and 137.34

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