Japanese yen inches higher as CPI data from Tokyo reinforces BoJ’s dovish stance

• The Japanese yen appreciates as rising inflation figures in Tokyo reinforce the BoJ’s dovish stance on its policy outlook.
• Tokyo’s CPI rose to 2.6% year-on-year in August, up from 2.2% in July.
• The US dollar is holding ground following stronger-than-expected economic data on Thursday.

The Japanese Yen (JPY) is recovering recent gains against the US Dollar (USD) following Friday’s Tokyo Consumer Price Index (CPI) data. Rising inflation in Tokyo is strengthening the Bank of Japan’s (BoJ) monetary policy stance, supporting the JPY and putting downward pressure on the USD/JPY pair.

Tokyo’s consumer price index (CPI) rose to 2.6 percent year-on-year in August from 2.2 percent in July. Core CPI also rose to 1.6% YoY in August, compared to the previous 1.5%. In addition, Japan’s unemployment rate unexpectedly rose to 2.7 percent in July, up from both the market estimate and June’s 2.5 percent, marking the highest unemployment rate since August 2023.

The downside for the USD/JPY pair may be capped as the US dollar maintains its recent gains following stronger-than-expected economic data released on Thursday. However, dovish remarks from the Federal Reserve could constrain further gains for the greenback.

Investors await July’s US personal consumption expenditure (PCE) price index, scheduled for release later in the North American session, looking for clues about the future direction of US interest rates.

Daily Digest Market Movers: Japanese yen inches higher on Tokyo inflation data

• According to the CME FedWatch tool, markets fully anticipate a rate cut of at least 25 basis points (bps) by the Fed at its September meeting.
• Atlanta Federal Reserve President Raphael Bostic, a prominent FOMC hawk, signaled on Thursday that it may be “time to move” on rate cuts because of further declines in inflation and a higher-than-expected unemployment rate. However, he wants to wait for confirmation from the next monthly jobs report and two inflation reports before the Fed’s September meeting.
• US Gross Domestic Product (GDP) grew at an annualized rate of 3.0% in the second quarter, beating both the expected and previous growth rate of 2.8%. In addition, initial jobless claims showed that the number of people filing for unemployment benefits fell to 231,000 in the week ended Aug. 23, down from 233,000 previously and slightly below the 232,000 expected.
• Core personal consumption expenditures (QoQ), the Federal Reserve’s preferred measure of underlying inflation, rose 2.8% in the second quarter, slightly below the market forecast of 2.9%. This marks a significant deceleration from the 3.7% growth seen in the first quarter.
• Japan’s Finance Minister Shunichi Suzuki said on Tuesday that foreign exchange rates are influenced by a variety of factors, including monetary policies, interest rate differentials, geopolitical risks and market sentiment. Suzuki added that it is difficult to predict how these factors will affect exchange rates.
• Bank of Japan (BoJ) Governor Kazuo Ueda addressed the Japanese parliament on Friday, saying he “does not consider selling long-term Japanese government bonds (JGBs) as a tool to adjust interest rates.” He noted that any reduction in JGB purchases would only represent about 7-8% of the balance sheet, which is a relatively small drop. Ueda added that if the economy lines up with their projections, there could be a phase where they could adjust interest rates a bit more.

Technical Analysis: USD/JPY remains below 145.00

USD/JPY is trading around 144.80 on Friday. Daily chart analysis indicates that the pair is positioned above the downtrend line, which indicates a bearish bearish trend. However, the 14-day Relative Strength Index (RSI) remains above 30, signaling a bearish trend confirmation.

On the downside, USD/JPY could test the immediate downtrend line around the 144.50 level. A break below this level could lead the pair to navigate the area around the seven-month low of 141.69 recorded on August 5, followed by the next rebound support at 140.25.

In terms of resistance, the USD/JPY pair may test the immediate barrier at the nine-day EMA (Exponential Moving Average) around 145.15. A move above this level could open the door for the pair to approach the resistance area near 154.50.

USD/JPY: Daily chart