USD/JPY price action: pair on steady climb ahead of BoJ meeting

Key points

• USD/JPY surpasses 155.5, yen weakens to 155.536 per dollar
• US dollar index hits 106.4 post-Trump election victory
• Fed cuts rates by 25 bps, with another cut expected in December
• BOJ maintains interest rate at 0.25%, highest since 2008
• Yen stability challenged by global uncertainties and BOJ policies

USD/JPY hits above 155.5 as yen weakens

The dollar-yen pair has achieved a steady climb this month, with the yen weakening to 155.536 per US dollar. This marks an over 3-month low for the yen, stemming primarily from the US dollar’s strength as well as Japan’s record producer price index rising by its largest margin in 14 months.

USD/JPY price history

US DXY hits two-year highs amid economic data releases

The US dollar index climbed to 106.4, reflecting monumental gains after last week’s Trump election victory. Trump policies are focused heavily on trade tariffs with other countries, leading to the dollar’s strength against most currencies. Meanwhile, the Federal Reserve announced a cautious 25 basis point rate cut last Thursday, balancing inflation concerns with a weakening labor market. Another similar rate cut is anticipated in December. This situation could weaken the dollar as political and fiscal uncertainties, combined with expected interest rate cuts, may reduce its appeal to investors seeking stable returns. Lower interest rates typically make a currency less attractive, potentially leading to further depreciation if economic conditions don't improve or if fiscal policies shift significantly. Furthermore, annual US inflation rose to 2.6% this October, a 0.2% increase from September, and core inflation remained at 3.3%. Consumer price index also increased by 0.2%, and analysts await Thursday’s producer price index report and Fed Chair Powell’s remarks, and retail sales data on Friday.

BOJ meeting ahead amid financial market data

As of its October meeting, the Bank of Japan (BoJ) maintained its short-term key interest rate at about 0.25%, its highest level since 2008. Governor Kazuo Ueda has expressed concerns about the increasingly unpredictable global economic environment, mentioning that the central bank has time to assess risk factors following its rate hikes in March and July. The Bank of Japan's policy board remains committed to further rate increases, provided that economic and price data align with its projections. In its quarterly outlook, the BoJ maintained its forecast for core inflation to reach 2.5% in fiscal year 2024, with inflation expected to remain around 1.9% for both fiscal years 2025 and 2026. In terms of GDP growth, the central bank kept its 2024 forecast at 0.6%, while predicting 1.1% growth for fiscal year 2025 and 1.0% for fiscal year 2026.

For the yen, these developments suggest a period of cautious monitoring as the BoJ weighs the necessity of further rate hikes against economic conditions. If the central bank proceeds with additional rate increases, it could strengthen the yen by making it more attractive to investors seeking higher returns. However, the global economic uncertainties highlighted by Governor Ueda may impact the Japanese yen's stability, especially if external factors such as trade disruptions or geopolitical tensions arise. The yen's trajectory will likely hinge on the balance between domestic economic growth, monetary policy, inflation targets, and the broader international economic landscape.

What’s next for USD/JPY?

While the dollar shows robust performance, the Federal Reserve's recent 25 basis point rate cut, with another anticipated post-FOMC meeting in December, introduces a level of uncertainty. These rate cuts could eventually weaken the dollar if political and fiscal uncertainties persist, reducing its allure to investors seeking stable returns. In Japan, the Bank of Japan (BoJ) has kept its key interest rate at about 0.25%, but should the BoJ decide to increase rates, it might strengthen the yen, making it more appealing to investors. However, ongoing global uncertainties could challenge the yen's stability, especially if geopolitical tensions or trade disruptions occur.

Looking ahead at the economic calendar, the USD/JPY pair's trajectory will depend on the interplay between US fiscal policies, potential Fed actions, and the BoJ's rate decisions. Traders should watch economic indicators, including upcoming US inflation reports and Japanese economic data, to anticipate future movements in this currency pair. The balance between economic growth, inflation targets, volatility, and global economic conditions will be crucial in determining the yen's path relative to the dollar in the forex market.

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