Japanese Yen celebrates softer US Dollar

The Japanese Yen has seen a rebound ahead of the weekend, with the pair gaining strength against the US Dollar after Tokyo inflation data increased expectations that the Bank of Japan will tighten its monetary policy.

The release of Tokyo CPI ex Fresh Food data in October saw the Yen rise against most counterparts, with the rate rising to 2.7%, beating expectations of 2.5% and the previous year’s 2.5%. This higher inflation raised expectations for the Bank of Japan raising interest rates, which would be supportive for the JPY.

The USD/JPY exchange rate fell back below the key 150 level on Friday, which is seen by many as subject to intervention by the Japanese Ministry of Finance. However, from a technical perspective, USD/JPY remains in an uptrend on a short, medium, and long-term basis, suggesting more upside is probable despite the dip.

The Federal Reserve’s Core Personal Consumption Expenditures – Price Index, for September, showed inflation in line with estimates when it was released on Friday.

The yield on the 10-year Japanese Government Bond (JGB) slipped to 0.876% on Friday, while the US 10-year Treasury yield also slid to 4.869%. The fall in US yields (-0.05%) was greater than that of their Japanese counterparts (-0.01%), partly explaining why the pair fell.

Because of the “carry trade,” in which investors borrow money in a currency with lower interest rates—the Yen in this case—and park it in a currency with higher interest rates, the US dollar, the USD/JPY is commonly seen as reflecting the yield differential between the two countries’ bonds. As long as the funding currency, the Yen in this case, does not appreciate, investors profit from the difference.

USD/JPY falls back below the 150 key psychological level on Friday, but the uptrend is still likely to resume. The next major target is at the 152.00 highs achieved in October 2022.

The pair has completed an ascending triangle on the daily chart and broken above the 150.16 high of October 3, confirming a breakout. A decisive break below the line would probably flip the trend bearish on that time frame, potentially precipitating a decline to the 148.70s initially.