- The U.S. dollar broadly lost ground on Friday, but remained near unchanged against the yen.
- CPI inflation in Japan declined in April.
- Risk appetite increased after the improving outlook for consumer inflation in the US.
USD/JPY rallied on Friday, closing close to where it started the day, just below the 157.00 level, as investors looked to regain balance after a tense week.
The Federal Reserve’s (Fed) broad hopes for a September rate cut were dashed this week after interest rate markets re-priced the course for an interest rate cut of at least a quarter point in September to less than flat. At the beginning of the week, interest rate markets were pricing in over a 70% chance of a 25 basis point interest rate cut in September.
Forecasts for the week ahead: Fedspeak and PCE remain in focus
Inflation in Japan’s national consumer price index (CPI) fell to 2.5% y/y in April, but the Bank of Japan (BoJ) remains doggedly determined to keep interest rates at rock-bottom, near-negative levels until it sees the expected lowering inflation above 2%. The BoJ now expects CPI inflation to fall below 2.0% by 2025 and through part of 2026.
With the BoJ solely focused on the fear of disinflation, lower Japanese interest rates continue to weaken the yen. The BoJ and Japan’s Ministry of Finance are widely believed to have directly intervened in global markets in early May, with BoJ financial operations reports revealing a nine trillion yen gap between reported operating expenses and broker forecasts, adding weight to “Yentervention” speculation.
Despite activity in global markets, the yen continues to lose weight, with yen-based pairs returning to record highs.
USD/JPY Technical Outlook
On Friday, the USD/JPY pair moved around 157.00, which led to it approaching short-term highs. USD/JPY has closed in the green on all but three of the last 15 trading days, rebounding from its Yentervention low near 152.00.
The pair continues to fall from multi-year highs set in tardy April above 160.00, but USD/JPY continues to drift deeper into a bullish trend above the 200-day exponential moving average (EMA) at 149.13.
