Japanese Yen drifts lower against USD; downside seems limited amid BoJ rate hike bets

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• The Japanese Yen moved away from a one-month top against the USD touched on Tuesday.

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• The divergent BoJ-Fed policy expectations should help limit any meaningful JPY downfall.

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• Traders might also opt to move to the sidelines ahead of the BoJ meeting starting Thursday.

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The Japanese Yen (JPY) edges lower against its American counterpart during the Asian session on Wednesday, though it remains close to over a one-month peak touched the previous day. The JPY continues to draw support from firming expectations that the Bank of Japan (BoJ) will hike interest rates on Friday. This marks a big divergence in comparison to bets that the Federal Reserve (Fed) will cut rates twice this year, which keeps the US Dollar (USD) depressed near a two-week low and contributes to capping the USD/JPY pair. 

Furthermore, uncertainties surrounding US President Donald Trump's potential tariffs could benefit the safe-haven JPY. Traders, however, seem reluctant and might opt to move to the sidelines ahead of the highly-anticipated two-day BoJ monetary policy meeting starting Thursday. The outcome will play a key role in influencing the near-term JPY price dynamics and provide some meaningful impetus to the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop seems tilted firmly in favor of the JPY bulls. 

Japanese Yen bulls have the upper hand amid bets for an imminent BoJ rate hike on Friday

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• Against the backdrop of hawkish remarks from Bank of Japan officials, optimism that rising wages will help Japan stay on track to meet the 2% inflation target sustainably supports prospects for an imminent rate hike on Friday. 

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• The head of Japan's largest trade union Rengo – Tomoko Yoshino – agrees with BoJ that there is wage rise momentum. The BoJ has repeatedly said that sustained, broad-based wage hikes are a prerequisite to raising short-term rates.

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• According to government sources, Japanese Prime Minister Shigeru Ishiba will emphasize strong wage growth surpassing inflation as a key element of his economic revival strategy in an upcoming policy speech to parliament. 

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• The markets are now pricing in over a 90% chance that the BoJ will raise interest rates at the end of a two-day policy meeting on January 23-24, from 0.25% to 0.5%, which would be the highest since the 2008 global financial crisis.

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• US President Donald Trump told reporters on Monday that he was thinking about implementing 25% tariffs on imports from Canada and Mexico as soon as early February, and also raised the possibility of a universal tariff.

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• Higher tariffs hinder economic growth and are often thought to lift inflation. Trump, however, did not outline any specific plans for tariffs. Moreover, officials said that any new taxes would be imposed in a measured way.

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• Moreover, the US Producer Price Index (PPI) and the Consumer Price Index (CPI) recently pointed to signs of abating inflation, strengthening expectations for two more interest rate cuts by the Federal Reserve later this year.

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• A modest bounce in the US Treasury bond yields assists the US Dollar to move away from a two-week low and the USD/JPY pair to stage recovery from the 154.75 region, or over a one-month trough touched on Tuesday.

USD/JPY needs to find acceptance below the 155.00 mark for bears to seize near-term control

From a technical perspective, the USD/JPY pair has been showing resilience below the 155.00 psychological mark and the lower boundary of a multi-month-old ascending channel. The subsequent move up, along with the fact that oscillators on the daily chart are yet to gain any meaningful negative traction, warrants some caution for bearish traders. Hence, it will be prudent to wait for a sustained break and acceptance below the trend-channel support before positioning for any further depreciating move. Spot prices might then accelerate the fall towards the 154.50-154.45 intermediate support en route to the 154.00 round figure, mid-153.00s and the 153.00 mark. 

On the flip side, the 156.00 round figure, closely followed by the overnight swing high, around the 156.25 region, now seems to act as an immediate hurdle ahead of the weekly top, around the 156.55-156.60 area touched on Monday. Some follow-through buying has the potential to lift the USD/JPY pair towards the 157.00 mark. The momentum could extend further towards the 157.25-157.30 area en route to the 157.60 region and the 158.00 round figure. A sustained strength beyond the latter could set the stage for a move towards retesting the multi-month peak, around the 159.00 neighborhood touched on January 10.