During the early hours of Friday in Asia, the USD/JPY pair is experiencing selling pressure, hovering around 156.25. The Japanese Yen is gaining strength against the US Dollar, influenced by a surprising inflation report from Japan. Financial markets are also anticipating the preliminary reading of the US S&P Global Purchasing Managers Index (PMI) later in the day.
On Friday, data released by Japan’s Statistics Bureau indicated that the National Consumer Price Index (CPI) climbed by 2.1% year-over-year in September, up from a previous 1.9%. The core CPI, which excludes volatile fresh food prices but includes fuel costs, also recorded a 2.1% increase YoY in September. This aligns with market expectations and is up from a revised 1.8% rise in August.
Moreover, the CPI excluding both fresh food and energy—an important measure for the Bank of Japan (BoJ)—rose by 2.4% YoY in September, following a revised 2.0% rise in August. This September figure marks the first time in nine months that Japan’s inflation has surpassed the BoJ’s target, creating a stronger case for a potential interest rate hike soon and providing a lift to the Yen.
On the US side, comments from Federal Reserve officials indicated there’s no immediate push for additional policy tightening. Just last week, Fed Chair Kevin Warsh expressed an optimistic view of the US economy but withheld any specific timelines on future rate hikes. Currently, traders perceive a 92.8% likelihood of a Fed rate increase during the policy meeting on October 27-28, based on the CME FedWatch Tool.
Expectations for BoJ Meeting
Analysts at Standard Chartered anticipate that the Bank of Japan will maintain its current policy rate of 1.25% during its meeting at the end of October, following a 25 basis points hike in September. They note, however, that the conversation is shifting; it’s becoming less about whether the BoJ will raise rates again and more about when that might happen.
While they consider December a potential meeting for a hike, they suggest that early January 2027 is more likely, emphasizing a gradual approach to tightening. Standard Chartered also highlights that the BoJ has reasons to continue normalizing its policy to support yield differentials and mitigate risks that could weaken the Yen, especially in the event of tighter US policy.
Warsh on Growth and AI
Fed Chair Warsh’s recent speech received a score of 5.6 out of 10 on the FXS Speechtracker, which is a bit below the historical average. His cautious tone, amidst comments on structural growth and an investment surge, reflected lingering concerns from past financial crises. He has repeatedly avoided making commitments about October or December meetings, keeping dollar traders focused on forthcoming data rather than clear guidance. His attention on artificial intelligence as a key demand driver was evident, suggesting the Fed’s need for vigilance regarding financial stability without providing explicit direction for immediate rate changes.
The FXS Fed Sentiment Index remained stable at a high level of 127.51, indicating a firmly hawkish outlook despite Warsh’s more cautious commentary. This stable reading suggests that the market aligns the remarks with existing expectations for a restrictive policy, lacking any strong dovish signals to alter the overall hawkish sentiment.
Technical Outlook for USD/JPY
In the daily analysis, the USD/JPY pair continues in a corrective phase after previously exceeding 160. It currently trades below a significant resistance area, with the price sitting under the 20-day Bollinger lower band, as well as the middle and upper bands, while being capped by the 100-day simple moving average (SMA). The Relative Strength Index (RSI) is at 38.20, having dropped below the neutral 50 line, indicating that downside pressure is still prevalent, although some overbought conditions have been adjusted.
On the upper side, initial resistance is seen around the 20-day Bollinger lower band at 156.75, with the Bollinger midline at 157.85 marking the next challenge for recovery. Further resistance exists at the upper Bollinger band around 159.00 and the 100-day SMA at 159.35, forming a broader resistance cluster that would need to be surpassed to ease the current bearish sentiment. With no significant support levels indicated below 156.38, any additional decline would find the pair searching for fresh demand zones.
