USD/JPY eyes inflation, household data

The Japanese yen is calm on Monday and is trading slightly higher, at 132.27. The yen ended the week on a strong note, posting gains of about 1% on Friday.

USD/JPY has shown significant volatility since late December. Last week, the pair traded in a range of over 500 points, which included breaking below the 130 line for the first time since May. We could see stronger movement again today, as Japan releases Tokyo Core CPI and Household Spending later in the day.

Tokyo Core CPI expected to rise to 3.8%

Tokyo Core CPI has been moving steadily higher since January 2022, when it came it a negligible 0.2%. The December report rose to 3.6%, up from 3.4%, and the upward trend is expected to continue, with a forecast of 3.8% for January. After years of deflation, rising prices have become the new norm. The Bank of Japan has repeatedly stated that it will not change its ultra-loose policy due to higher inflation. Governor Kuroda said last month that he expects inflation to fall below the 2% target as the effect of soaring import costs will ease. The BOJ shocked the markets in December by widening the yield curve band, and there is speculation that Kuroda’s successor, who will take over in April, could raise the yield targets on long-term bonds, which would be a major policy change.

High inflation has taken a bite out of Household Spending, which fell to 1.2% in October, down from 2.3% a month earlier. The downtrend is expected to continue, with a weak gain of 0.6% expected for November.

The US dollar was lower across the board on Friday, after the US posted some soft data. Nonfarm payrolls was slightly better than expected at 223,000, but wage growth headed lower. Average hourly earnings rose 4.6%, well off the 5.0% estimate and shy of the prior reading of 4.8%. The ISM Services PMI underperformed, slipping to 49.6, down sharply from 56.5 and the forecast of 55.5. This marked the first time the PMI has fallen into contraction territory since May 2020, with a reading below the neutral 50.0 threshold. The drop in wages and the weak services data indicate that the US economy is slowing and is likely to tip into recession, which could force the Fed to reconsider its aggressive rate-tightening policy.

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USD/JPY Technical

• There is weak support at 132.13, followed by 131.14
• 133.28 and 134.75 are the next resistance lines

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