USD/JPY TALKING POINTS & ANALYSIS

• USD/JPY uptrend remains in place
• Interest rate differentials continue to support the US Dollar
• Kazuo Ueda cast doubt on domestic demand despite strong inflation

JAPANESE YEN FUNDAMENTAL BACKDROP

The Japanese Yen was a little weaker against the United States’ Dollar on Friday as global investors digested parliamentary testimony from the Bank of Japan’s incoming governor. It seemed to suggest that he’ll represent clear continuity with his predecessor, and that ultra-loose monetary conditions are going nowhere anytime soon.

Kazuo Ueda will take the reins from long-serving Haruhiko Kuroda on April 8, his confirmation is expected from Japan’s parliament next month.

He spoke after official data showed core Japanese inflation at a 41-year peak of 4.2% in January, having now exceeded the BoJ’s 2% target for nine straight months. However, current price rises are clearly driven by imported costs, rather than by the domestic demand the BoJ has been trying mightily to stimulate for decades. Ueda said that, while prices may rise gradually, it will take more time for that 2% level to be sustainably reached.

His comments were perhaps a little more dovish than global markets were expecting, and as investors are keen for any steer as to what Ueda’s approach will be in office, it’s perhaps unsurprising that the Japanese Yen should have fallen a little.

The market is already starting to accept that a turn in the US interest-rate hiking cycle may yet be some way off, even if borrowing costs don’t rise sharply from here. In the end the inflation data are running this table and, until they show meaningful contraction, higher interest rates will remain the only possible response.

With that in mind, the January consumer price index inflation numbers from the US Personal Consumption and Expenditure (PCE) series is due later on Friday. They’re expected to show a modest deceleration from December’s pace, but to remain above 4%.. Given the febrile focus on all price information now, the US Dollar may slip back a little across the board, and not just against the Yen, if there’s any sign that price pressures are easing.

The University of Michigan’s consumer sentiment indicator will round out the data week.

USD/JPY Technical Analysis

USD/JPY daily chart compiled using TradingView

USD/JPY’s latest uptrend began on January 13, but it accelerated on February 2 when a more obvious and sharply upward sloping uptrend line began to form.

Dollar bulls presumably take some comfort from the fact that that line now comfortably below the market at 133.146, where it now provides support.

The pair has moved up into a trading band defined by December 2’s closing low of 134.033 and December 13’s intraday peak of 138.001. This upward level was tested quite frequently before Dollar bulls capitulated with December 21’s long slide.

Despite subsequent attempts this range has effectively barred upside progress since then and bulls will have to consolidate their position within in it if they are to effectively push higher. That said it will be important to watch how they do on both a weekly and monthly closing basis as February bows out. The Dollar has plenty of fundamental support and it seems likely that the pair will continue to gain.

There is some trading caution out there now, however, with only 38% of IG respondents bullish on the near-term prospects for USD/JPY. If exhaustion sets in, that uptrend line could see a test.

–By David Cottle for DailyFX