Japanese Yen bulls turn cautious; USD/JPY recovers further from one-month low

• The Japanese Yen ticks lower and erodes a part of its strong weekly gains against the USD.
• Rising bets for a BoJ rate hike next week should help limit any meaningful JPY depreciation.
• Expectations that the Fed will cut rates further undermine the USD and might cap USD/JPY. 

The Japanese Yen (JPY) weakens slightly against its American counterpart and assists the USD/JPY pair in recovering over 50 pips from sub-155.00 levels or a one-month trough. Any meaningful JPY depreciation, however, seems elusive in the wake of rising bets that the Bank of Japan (BoJ) will hike interest rates again next week. The expectations were lifted by BoJ Governor Kazuo Ueda and Deputy Governor Ryozo Himino’s remarks earlier this week. This, along with the cautious market mood, should continue to act as a tailwind for the safe-haven JPY.

Meanwhile, investors started pricing in the possibility that the Federal Reserve (Fed) will lower borrowing costs twice this year amid signs of abating inflation in the US. This has been a key factor behind a sharp retracement slide in the US Treasury bond yields since early this week and the resultant narrowing of the US-Japan yield differential could further underpin the JPY. That said, a modest US Dollar (USD) uptick, though it lacks any fundamental catalyst, lends support to the USD/JPY pair as traders look to the US housing market data for fresh impetus. 

Japanese Yen remains on the back foot against USD; BoJ rate hike bets could limit deeper losses

• Bank of Japan Governor Kazuo Ueda reiterated on Thursday that the central bank will raise the policy rate this year if economic, and price conditions continue to improve.
• Earlier this week, BoJ Deputy Governor Ryozo Himino said that a rate hike will be discussed at next week’s meeting as prospects of sustained wage gains heighten.
• Data released on Thursday showed that producer prices in Japan increased for the 46th consecutive month and came in at the 3.8% YoY rate for December 2024.
• This comes on top of a decline in Japan’s real wages and household spending for the fourth month in November, pointing to broadening inflationary pressures.
• Markets now see about a 79% chance of a 25-basis-point increase at the end of the January 23-24 meeting, which might continue to underpin the Japanese Yen. 
• Meanwhile, the softer US Producer Price Index and Consumer Price Index (CPI) released this week suggested that the underlying inflation slowed last month.
• This, in turn, fueled speculations that the Federal Reserve may not necessarily exclude the possibility of cutting interest rates further by the end of this year.
• The US Commerce Department reported that Retail Sales increased 0.4% in December and the previous month’s reading was revised higher to show a 0.8% gain. 
• Moreover, the Philly Fed’s Manufacturing Index surpassed even the most optimistic estimates and surged to the highest level since April 2021, to 44.3 this month.
• Separately, data published by the US Labor Department showed that Initial Jobless Claims rose more-than-expected, to 217,000 during the week ended January 11.
• Fed Governor Christopher Waller said on Thursday that inflation is likely to continue to ease and allow the US central bank to cut rates sooner and faster than expected.
• Waller added that as many as three or four quarter-percentage-point rate reductions could still be possible this year, dragging the US Treasury bond yields lower. 
• The Fed, however, might still adopt a more cautious approach towards cutting interest rates in 2025 on the back of the still resilient US economy and labor market. 

USD/JPY needs to find acceptance above the 156.00 mark to support prospects for further gains

From a technical perspective, sustained break and acceptance below the 155.00 psychological mark could drag the USD/JPY pair towards the 154.60-154.55 region, representing the lower boundary of a multi-month-old ascending channel. Some follow-through selling will be seen as a fresh trigger for bearish traders and make spot prices vulnerable to accelerate the slide to the 154.00 mark en route to the next relevant support near the 153.35-153.30 horizontal zone.

On the flip side, attempted recovery might now confront stiff resistance near the 156.00 mark ahead of the 156.30-156.35 horizontal zone. The next relevant hurdle is pegged near the 156.65-156.70 region, above which the USD/JPY pair could aim to reclaim the 157.00 round figure. The subsequent move-up could lift spot prices further to the 157.40-157.45 intermediate barrier en route to the 158.00 mark and the 158.85 region, or a multi-month top touched last week.