Japan's Economy Is Not Yet In A Phase Where The Central Bank Can End Yield Curve Control

Kuroda Stayed On The Sidelines And The Yen Responded With Losses
  • USD/JPY is aiming to shift its auction profile above 137.00 as the risk-off mood is strengthening further.
  • Mixed views on the Federal Reserve policy outlook have escalated anxiety among the market participants.
  • The Bank of Japan is aggressively working to achieve a 2% inflation rate.
  • USD/JPY is expected to accelerate gains amid technical tailwinds.

USD/JPY is hovering around the critical hurdle of 137.00 in the early European session. The asset is aiming to shift its business profile above the aforementioned critical hurdle as investors are getting anxious ahead of the announcement of the interest rate decision by the Federal Reserve (Fed). Volatility will stay a little longer this time as it is the last monetary policy of CY2022, which is expected to remain uncertain due to rising expectations of a slowdown in the pace of the interest rate hike. Also, Federal Reserve chair Jerome Powell is expected to provide interest rate guidance for the whole CY2023.

S&P500 is displaying a subdued performance as investors await more development on Federal Reserve’s policy outlook through commentary from Federal Reserve policymakers. The 10-year US Treasury yields have surrendered gains and are auctioning below 3.57%, at the time of writing.

The US Dollar Index (DXY) is displaying back-and-forth moves around the immediate resistance of 105.20. The US Dollar is facing hurdles in overstepping the 105.20 resistance despite a solid risk aversion theme in the global market.

Mixed views on Federal Reserve policy outlook muddle investors’ sentiment

After the release of the Federal Open Market Committee (FOMC) minutes for October’s monetary policy, it was clear that Federal Reserve policymakers are advocating a deceleration in the interest rate hike pace. Federal Reserve chair Jerome Powell and his teammates were in favor of reducing financial risks and assessing the impact of efforts made by the Federal Reserve in achieving price stability.

Now, the release of upbeat payroll data for November and fresh demand in the United States service sector has triggered the option of a bigger rate hike continuation to safeguard the economy from a rebound in inflation. There is no denying the fact that higher employment generation and solid demand in service sector have the potential to spur the inflation rate again.

Rabobank analysts said they expect the United States central bank to hike the policy rate by 50 basis points (bps) and see policymakers revising the terminal rate projection to the neighborhood of 5%.

United States Inflation to set a stage for Federal Reserve’s policy

Before the announcement of the last monetary policy of CY2022 by the Federal Reserve on Wednesday, investors are awaiting the release of Tuesday’s Consumer Price Index (CPI) data. As per the consensus, the headline inflation is expected to remain unchanged at 7.7% while core CPI that excludes oil and gas prices will inch higher to 6.4% from the former release of 6.3%.

The United States Producer Price Index (PPI) data released on Friday is indicating the continuation of a slowdown in the inflation rate. The price Index for factory-gate rates was trimmed to 7.4% in line with expectations. A decline in prices for final products indicates a decline in demand, which forced producers to go easy on decision-making for end-products prices.

However, investors should brace a surprise jump in inflation as the United States economy added 263K jobs in November more than the expectations of 200K. Tight labor demand is accompanied by premium earnings that could result in solid demand for durable goods by households.

Bank of Japan to continue policy easing despite rising wages

The risk of a decline in inflation has been triggered after a contraction in Japan’s Gross Domestic Product (GDP) numbers. A subdued demand never propels a hike in the price rise index. Bank of Japan (BOJ) Haruhiko Kuroda is of the view that even if wages rise by 3%, the BOJ will maintain its current easy policy until inflation reaches 2%. This would weigh more pressure on the Japanese yen.

Meanwhile, Bank of Japan (BOJ) board member Hajime Takata said in an interview with the Nikkei newspaper published on Saturday that Japan's economy is not yet in a phase where the central bank can end yield curve control. He further added that there were some positive signs in corporate capital expenditure and wages, as reported by Reuters.

USD/JPY technical outlook

USP/JPY has accelerated to near the downward-sloping trendline plotted from November 22 high around 142.24. The asset is at a make or a break after a firmer rally. A bull cross, represented by the 20-and 50-period Exponential Moving Averages (EMAs) at 136.5, indicates more upside. Meanwhile, the Relative Strength Index (RSI) (14) has moved into the bullish range of 60.00-80.00. Sustainability above the same will keep the reins in the asset solid.



Kuroda Stayed On The Sidelines And The Yen Responded With Losses

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