USD/JPY Up as Data & Fed-Speak Support the Greenback

USD/JPY Analysis

Earlier in the week, US CPI inflation report revealed a slight moderation in both headline and core figures, but they were higher than expected. Yesterday's data showed that factory gate prices followed a similar pattern. Headline PPI came in at +6.0% y/y vs 5.4% expected and 6.2% prior, while the Core printed +5.4% y/y vs 4.9% expected and 5.5% prior.

Chair Powell recently acknowledged the declining prices, saying that the "disinflationary process" has begun. He did warn though, that the road will be "bumpy" and the process will require "quite a bit of time" ^[1]. Yesterday's data support this narrative and the view that markets have been overly optimistic about the progress of inflation and the Fed's policy path.

This week we got fresh hawkish remarks from a series of central bank officials, with the latest coming from two non-voting members, after the PPI report. Ms Mester repeated that policymakers need to bring rates "above 5 percent and hold it there for some time" ^[2], while Mr Bullard noted that "continued policy rate increases" ^[1] can help "lock" the disinflationary trend this year ^[3].

The surprisingly strong employment report at the beginning of February, sparked a hawkish repricing around the Fed's terminal rate, while economic data and Fed-speak since then, have reinforced the more aggressive market expectations. At the time of writing, CME's FedWatch Tool assign the highest probability to rates peaking at 5.5%, which is more aggressive that the path implied by the Fed's projection. ^[4]

USD/JPY comes from a three-month losing streak, as the Fed has been slowing down its pace of tightening, whereas the Bank of Japan had offered a hawkish surprise in December. It changed its yield curve control, now allowing 10-year JGB yield to rise up to 0.5% (from 0.25%) ^[5]. This has opened the door to policy normalization, but those who expected a fast and straightforward move away from the ultra-loose setting, have been disappointed so far.

These factors help the pair to a profitable month and a break above key tech levels this week, extending its gains today. USD/JPY now targets the 38.2% Fibonacci of the October multi-decade high/January low fall (136.66), but it is probably early to talk about further rebound to 139.39-58.

On the other hand, the Relative Strength Index (RSI) is close to overbought levels, which can put a cap on the greenback's strength. As such, a correction back towards the EMA200 (131.90) would not be surprising, although sustained weakness towards and below 130.00 looks hard, given the current monetary policy differential.

Markets will looking forward to more key data from the US next week, as well as any news and insights around the successor of Mr Kuroda, who will step down from the BoJ's helm in April.