USD/JPY extends rally ahead of BOJ Core CPI

• USD/JPY climbs for a third straight day
• BoJ Core CPI will be released Tuesday
• New BoJ Governor Ueda chairs his first meeting later this week

Japan inflation in focus

This week’s data calendar out of Japan will be dominated by inflation releases and the Bank of Japan’s two-day meeting at the end of the week. Traders will be keeping a close eye on BoJ Core CPI, which will be released on Tuesday. The index, which is the BoJ’s preferred inflation gauge, fell from 3.1% to 2.7% in February. Another drop would support the central bank’s view that inflation is falling back towards the 2% target.

Inflation has been running above 3% and this has raised speculation that the BoJ will respond by tightening policy, which would likely send the yen sharply higher. The BoJ has insisted that it will not tighten until it is convinced that higher inflation is sustainable and not a result of more expensive goods and raw materials. The uncertain outlook for global growth and a weak domestic economy means that the BoJ is in no rush to shift policy.

New Governor Ueda has been consistent in his message that he will maintain an ultra-loose policy, but nonetheless, speculation continues that the BoJ will tweak or even abandon its yield curve control, which has been criticised for distorting bond market pricing. I suspect that speculators hoping for a shift in policy that will send the yen higher will be disappointed after this week’s meeting, as Ueda is unlikely to rock the boat at his first meeting. The BoJ will provide updated quarterly growth and inflation forecasts, which could provide a hint as to future monetary policy.

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USD/JPY Technical

• USD/JPY is testing resistance at 1.3427. Next, there is resistance at 1.3499
• 133.41 and 1.3269 are providing support

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