• The Japanese yen depreciated as the Japanese CPI fell to 2.5% y/y in April from 2.7% earlier.
• Inflation in Japan remains above the 2% target, keeping the BoJ under pressure to tighten policy further.
• The US dollar gained in value after stronger US PMI data confirmed that the Fed could keep higher rates for longer.

The Japanese yen (JPY) continued to decline on Friday after the Japan Bureau of Statistics released lower national consumer price index (CPI) data. The annual inflation rate fell to 2.5% in April from 2.7% the previous month, marking the second consecutive month of moderate inflation but still above the Bank of Japan’s (BoJ) target of 2%. This persistent inflation puts pressure on the central bank to consider further policy tightening.

The Bank of Japan stressed that a positive cycle of sustained, stable implementation of the 2% price target combined with robust wage growth is necessary for policy normalization. Meanwhile, investors expect that the continued weakness of the yen may force the BOJ to accelerate another interest rate escalate to mitigate the impact of this decision on the cost of living, Reuters reports.

The US dollar (USD) is gaining ground following hawkish sentiment around the Federal Reserve (Fed) regarding maintaining higher interest rates for an extended period. This sentiment is reinforced by better-than-expected Purchasing Managers’ Index (PMI) data from the United States (US), which was released on Thursday.

According to the CME FedWatch Tool, the likelihood of the Federal Reserve cutting interest rates by 25 basis points in September fell to 46.6% from 49.4% the day before.

Market overview: Japanese yen deepens losses after lower CPI

• Japan’s core CPI (y/y), which excludes fresh food but includes fuel costs, rose 2.2% in April in line with expectations, slowing for a second straight month from March’s reading of 2.6%.
• The S&P Global US Composite PMI rose to 54.4 in May from 51.3 in April, reaching its highest level since April 2022 and beating market expectations of 51.1. The services PMI rose to 54.8, reflecting the strongest manufacturing growth in a year, while the manufacturing PMI rose to 50.9.
• The Bank of Japan announced on Thursday that it had left Japanese government bond (JGB) amounts unchanged from the previous operation. More than a month ago, the BOJ cut the purchase amount for 5-10 years as part of a planned operation.
• Tensions rise after Lai Ching-te takes office as the up-to-date president of Taiwan. Chinese state media reports indicate that China has deployed numerous fighter jets and carried out simulated attacks in the Taiwan Strait and around groups of islands controlled by Taiwan, Reuters reports.
• Japan’s Manufacturing Purchasing Managers’ Index (PMI), released on Thursday by Jibun Bank and S&P Global, rose to 50.5 in May from 49.6 in April, beating market expectations of 49.7. This marks the first escalate since May 2023. Meanwhile, the Services PMI fell to 53.6 from the previous 54.3, still marking the fastest expansion in eight months.
• The yield on Japan’s 10-year government bond exceeded 1% this week for the first time since May 2013, helped by rising investor expectations that the Bank of Japan will tighten policy further in 2024.

Technical Analysis: USD/JPY moves above the psychological level of 157.00

On Friday, the USD/JPY pair is trading at around 157.10. A rising wedge formation on the daily chart suggests a potential bearish trend reversal as the pair approaches the top of the wedge. Despite this, the 14-day Relative Strength Index (RSI) remains above 50, indicating continued momentum. A drop below this level would mean a change in dynamics.

USD/JPY may retest the upper boundary of the rising wedge around 157.20. If it breaks above this level, the pair could move higher towards the recent high of 160.32.

On the other hand, the nine-day exponential moving average (EMA) at 156.33 appears to provide immediate support, followed by the lower end of the rising wedge and the psychological level of 156.00. A break below this level could put downward pressure on the USD/JPY pair, potentially pushing it towards the reversal support level at 151.86.

USD/JPY: Daily chart