Japanese Yen under mild pressure ahead of US CPI inflation data

• Modest buying keeps USD/JPY near 157.95 during early European trade on Tuesday.
• A December interest rate increase remains possible, the BoJ’s summary indicated.
• Tuesday’s US CPI inflation release for October will draw close market attention.

Gains in USD/JPY remain modest, with the pair trading around 157.95 in Tuesday’s early European session as the Bank of Japan’s (BoJ) hawkish stance could restrict further upside. The possibility of currency intervention by Japanese authorities also keeps traders on alert. Attention will turn to the US Consumer Price Index (CPI) inflation release later on Tuesday.

A December rate increase appears a strong possibility after BoJ board members indicated that a near-term hike was necessary. Their views were set out in the summary of the October policy meeting, published on Tuesday. One of the nine board members said: “The Bank should decide on the next policy interest rate hike when it is possible without becoming overly cautious,”

The Japanese Yen (JPY) could strengthen against the US Dollar (USD) in the near term if Japanese officials intervene in currency markets. Data published on Monday in the Ministry of Finance’s (MOF) quarterly release showed that Japan intervened on three days between July 30 and August 3.

At 7.98 trillion JPY ($50.36 billion), the July 30 intervention was the largest, surpassing the earlier record of 6.28 trillion JPY recorded on April 30.

Tuesday’s US inflation release will be a key focus for traders, with economists forecasting a 0.3% MoM increase in October’s headline CPI. Core CPI, meanwhile, is expected to rise by 0.2%.

Stronger US inflation could bolster the case for the Federal Reserve (Fed) to increase interest rates in December, lending support to the Greenback. An annual October CPI reading will, however, be absent from the report because of the government shutdown a year earlier.

Can BoJ tightening expectations and JGB trends sustain support for the Yen?

Rabobank analysts describe the JPY as one of this year’s leading performers, observing that “the JPY is the second best performing G10 currency in the half year to date.” While they recognise that “this strong ranking has been obtained with the support of sizeable FX intervention over 3 days during the summer, which included joint support with the US Treasury,” they also see more recent gains as reflecting the currency’s own strengths. They specifically note that “the JPY has managed to outperform the USD on a 1-month view with the market displaying a clear reluctance to push USD/JPY above the 158.70 area which coincides with the 200-day sma.”

Turning to monetary policy, Rabobank observes that “while the sell-off in the Nikkei 225 at the end of last week depressed market expectations regarding the chances of a December BoJ rate hike, the strength of September wage data supports the potential for further policy tightening both next month and into next year.” On that basis, the analysts say that “in our view, this suggests USD/JPY can edge lower to the 155.00 area on a 3-month view.” They also identify bond-market conditions as a factor, noting that “another component of any JPY turnaround would likely be a more robust tone in the JGB market,” which “could contribute to a more supportive backdrop for the JPY in the months ahead.”

On fiscal conditions and capital flows, Rabobank points out that “Japan’s primary deficit is better than the G7 average and there is speculation that Japan’s huge asset managers may be tempted to repatriate to take advantage of higher JGB yields. This would have positive implications for the JPY.” As for upcoming releases, the analysts note that “Q3 GDP data and October national CPI inflation, both due next week, will be of interest to BoJ watchers,” while retaining their assessment that “we remain cautiously optimistic on the medium-term outlook for the JPY.”

Why is Daly sounding more hawkish despite robust jobs data?

Inflation remained central to Fed’s Daly’s remarks, which struck a more hawkish tone than usual. Her FXS Speechtracker score stood at 8/10, against a historical average of 6.4/10. She stressed that inflation “has to be number 1 priority” despite characterising the jobs report as good news and saying wage growth “isn’t booming.” Falling real wages and inflation that has remained high for too long were key themes, alongside the message that policy “will have to” be tightened further. Although the timing remains dependent on incoming data, the remarks suggest a preference for further rate increases, underpinned by confidence in labour-market strength and relatively limited worries about growth.

A 0.95-point increase took the FXS Fed Sentiment Index to 143.10, leaving the broader tone of Fed communication firmly hawkish and substantially above the neutral 100 mark. Alongside the high FXS Speechtracker score, Daly’s comments strengthen expectations of further policy tightening. Such a backdrop is generally supportive of both the Dollar and yields.

Technical Analysis: Can USD/JPY overcome the key 100-day SMA?

Trading below the 100-day Simple Moving Average (SMA) leaves USD/JPY with a mildly bearish short-term bias on the daily chart, even as it holds just above support at the 20-day Bollinger middle band. Price is hovering around the midline as the Bollinger bands narrow. With the Relative Strength Index (RSI) near 51 indicating neutral momentum, the recent downward pressure appears to be consolidating rather than gathering pace for now.

The 20-day Bollinger upper band, near 158.90, provides the first upside resistance. Close above it, the 100-day SMA at 159.00 creates a narrow resistance zone that the pair must reclaim to soften the current corrective bias. Initial downside support lies around 157.95 at the Bollinger middle band, ahead of the lower band near 156.95. A daily close beneath that lower boundary could pave the way for a sharper retreat within the wider trading range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)