Japanese Yen Outlook: Markets Prioritise CPI Beat over Lower Trending Prices

Japanese Yen (USD/JPY, EUR/JPY, AUD/JPY) Analysis

Japanese Inflation Beats Forecast but Continues Steady Decline

Inflation in Japan printed better-than-expected for the month of January, coming in at 2.2% vs the prior 2.6%. Markets appear to have bushed aside the recent easing of price pressures as inflation has been falling every month since October’s 3.3%. Instead they remain focused on the fact that the headline measure remains above 2% and the core figure surpassed expectations of 1.8% to come in at 2%.

Inflation in Japan is scrutinized more than ever now that the Bank of Japan (BoJ) favours a scenario where interest rates can move out of negative territory. The BoJ has mentioned the two preconditions that will necessitate a hike in borrowing rates. The first, consists of inflation remaining stably and sustainably above 2% and the other condition centers around seeing wage growth move in a similar way.

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USD/JPY Dips but Remains in the ‘Danger Zone’

USD/JPY headed lower on Tuesday after January’s inflation data kept readings above 2%, strengthening the yen but not in a way that would suggest further appreciation. Prices remain above the 150.00 mark – a region that has witnessed two separate periods of FX intervention by the ministry of finance in 2022. Officials have denied that the level of USD/JPY is being watched but rather, unfavourable, volatile declines have been identified targeted for having a negative effect on the local economy.

The pair trades around 150.23 at midday (GMT) but respects the psychological level of support at 150.00. The FX market has not regarded recent warnings by Tokyo officials as credible and have continued to favour carry trades, to the detriment of the yen.

The pair is likely to see a pick up in volatility from tomorrow into Thursday when high impact US data in the form of US Q4 GDP (second estimate) and PCE data are due. Apart from that, there is little to suggest that the yen will gain favour particularly when you consider the one-sided positioning form large hedge funds and money managers.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

‘Smart money’ positioning continues to accumulate on the short side for the yen as can be seen in the chart below, depicting the latest positioning data from the CFTC’s Commitment of Traders report. The downward histograms reveal the net position of large funds which is approaching recent lows as short positions have been added at a notable pace over the last few weeks.

Source: Refinitiv Datastream

USD/JPY is one of the most liquid and frequently traded currency pairs in the world. Learn the nuances involved in trading the pair below:

EUR/JPY Uptrend Remains Intact

EUR/JPY has been in the ascendancy, like many G7 currencies, as the yen weakened. The pair has traded comfortably above 161.70 and has recently entertained lofty ambitions of a return to 164.31 – the apex of the major 2023 advance.

At the end of 2023, the pair retraced by around 38.2% of the major advance but found a solid zone of support that had previously repelled lower prices and has moved higher since then.

The slightly lower move today reflects the optimism around an eventual move out of negative interest rates and what was technically an inflation report that beat expectations to the upside. The RSI is also revealing a comeback from overbought territory meaning a modest pullback would not go amiss. However, the MACD confirms that momentum still favours a bullish continuation over a longer time frame which may see the pair retest 164.31 in the absence of any intervention from officials in Tokyo.

EUR/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

AUD/JPY Turns the Corner Ahead of Monthly Australian CPI Data

AUD/JPY revealed signs of potential bullish fatigue towards the end of last week where the Thursday and Friday daily candles presented long upper wicks. Monday witnessed a move lower as Asian-linked sentiment started the week on the back foot. Chinese indices snapped an eight-day run of gains at the start of the week to cool risk sentiment.

Australian CPI data could help spur on the Aussie dollar as inflation is expected to have picked up in January with the estimate at 3.6% compared to 3.4% in December (year-on-year readings).

The pullback may prove short-lived if the prior advance is anything to go by and also by virtue of overwhelming short positioning in the yen.

AUD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX