The US Fed kept rates at 5.25%-5.50% for third straight meeting last month, hinted that the terminal level may have been reached and the updated projections imply at three cuts this year. However, inflation is still far from target and has shown persistence recently, with headline CPI accelerating by 3.4% y/y in December. Furthermore, the economy is outperforming and the labor market remains strong. More than 200,000 jobs were added that month in the best print since September and jobless claims dropped substantially according to yesterday's data.
As a result, we have seen a series of Fed voters adopting a more reserved approach this week, despite calling for lower rates. Governor Waller sees "no reason to move as quickly or cut as rapidly as in the past" , while Mr Bostic places the start of this process in the third quarter . The latest data and Fed speak has tempered the aggressive market pricing around the Fed's policy path. CME's FedWatch Tools still points to 150 basis points of cuts, with the first to take place in March, but now assigns just 53.8% probability to the latter. 
At the same time, hopes that the Bank of Japan will normalize its ultra-loose policy setting have diminished. Policymakers have already taken steps to that direction and have hinted toward an eventual exit form negative rates, but don't appear ready yet to change tack. They stood pat last month and don't seem yet confident that the 2% inflation goal has been achieved in a "sustainable and stable manner". Today's CPI release likely doesn't help towards policy normalization since although inflation (ex fresh food) stayed below target for twenty one straight months, it decelerated further to 2.3% y/y.
The Bank of Japan announces its next policy decision on Tuesday along with updated projections and the outcome will determine the trajectory of USD/JPY. The CPI report raises the bar for action and officials may want to wait for the spring wage negotiations, although they have surprised before.
USD/JPY slumped during the past two months on prospects for a pivot by both central banks, but rallies at the start of the new year and extends its gains this week due to the a tempering in expectations. This brings back in the spotlight the 152.20 handle, which is the highest level since 1990, but fresh impetus will be required. On the other hand, the advance looks stretched and markets still see multiple rate cuts by the Fed and a shift from the Bank of Japan. As such, there is risk for renewed pressure and a breach of the EMA200 (145.40), but 140.26 is distant.
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
Retrieved 19 Jan 2024 https://www.federalreserve.gov/newsevents/speech/waller20240116a.htm
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