Created on October 21, 2024

• The USD/JPY exchange rate continued to rise as the US Dollar Index (DXY) and bond yields rose to their highest point in months.
• According to Forex trading, the USD/JPY pair rose to a high of 150.28, its highest level since August 1, and 7.5% above its lowest point this year.

Japan’s Inflation and BOJ Expectations

The USD/JPY pair maintained its upward trajectory after Japan released encouraging inflation data on Friday. According to the Statistics Bureau, Japan’s core consumer price index declined by 0.3% in September, following a 0.5% increase in the previous month. Obviously, this translated into a year-on-year increase of 2.5%, lower than the previous 3.0%.

The core CPI came in at 2.4% in September, above the median estimate of 2.3%. also, it was an improvement from the previous increase of 2.8%. The figures suggest that inflation in Japan is moving in the right direction and is likely to reach the Bank of Japan’s 2.0% target in the coming months. Analysts expect the Bank of Japan to adopt a wait-and-see approach before committing to raising interest rates at upcoming meetings. Furthermore, unlike other global central banks, the Bank of Japan has adopted a relatively hawkish tone in the past few months. It first raised interest rates by 0.10% earlier this year and then by another 0.25% in July. Also, the 0.25% rise caused major global volatility as investors began to unwind the carry trade on the Japanese yen. A carry trade is a situation where investors borrow a currency with a lower return and invest in another currency with a higher return. For a long time, investors have borrowed the negative-yielding Japanese yen and invested in other assets in the United States, Australia and other countries. Therefore, with the Japanese economy weakening and inflation moving in the right direction, the Bank of Japan is likely to keep interest rates at the current rate for some time.

Moreover, this explains why Japanese government bond yields continue to rise. The 10-year bond yield rose to 0.97% on Friday, its highest level since August 7, and a 32% increase from its September low.

Federal Reserve Actions

Also, The USD/JPY exchange rate made a strong comeback due to the Fed’s actions. At its last meeting, the bank decided to cut US interest rates by 0.50%, the largest rate in more than four years. Since then, the US has posted strong economic figures. Data released earlier this month showed that the unemployment rate fell to 4.1% in September, the lowest level in two months.

The US economy added more than 254,000 jobs in September while wage growth continued to expand during the month. Meanwhile, inflation in the US fell at a slower pace than expected. The US headline CPI fell from 2.5% in August to 2.4% in September. On the other hand, core inflation remained unchanged at 3.2%. Overall, the latest US economic data showed that core retail sales rose by 0.5%. Meanwhile, the headline figure rose to 0.4%. Both initial and continuing jobless claims figures were better than expected last week. Therefore, the Fed is likely to act in two ways at the next meeting: cut interest rates by 0.25% or keep them steady.

This explains why the US Dollar Index (DXY) rose to 103.87 dollars, its highest level since August 2. It has risen by more than 3.52% from its yearly low. Also, US Treasury bond yields have risen. The yield on 10-year bonds rose to 4.088%, its highest level since July 31. Similarly, the yield on 5-year bonds rose to 3.9%.

USD/JPY Technical Analysis and Expectations Today:

The daily chart shows that the USD/JPY exchange rate made a strong comeback this week. It rose to 150, its highest level since July 31, and 7.15% from the August low. The pair moved above the 38.2% Fibonacci retracement point. Also, it crossed the 50- and 100-day exponential moving averages (EMA). The Relative Strength Index (RSI) moved above the neutral point at 50, while the MACD crossed the zero line. Therefore, the USD/JPY pair is likely to continue its rise as bulls target the next point at 153.70, which is the 23.6% retracement point.

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