USD/JPY Fundamental Daily Forecast – Pressured by BOJ Policy Shift Expectations Ahead of Fed Meeting

The Dollar/Yen fell on Friday as inflation data reinforced market expectations that quickening inflation could urge the Bank of Japan (BOJ) to move away from its ultra-easy policy. Meanwhile, traders showed little reaction to U.S. inflation data that came in a little higher than expected.

Essentially, Japanese Yen bulls are betting the BOJ will eventually move toward a less-dovish policy, while the Federal Reserve moves closer to its terminal interest rate.

On Friday, the USD/JPY settled at 129.859, down 0.370 or -0.28%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) finished at $71.80, up $0.24 or +0.34%.

BOJ Preparing to Move Away from Ultra-Dovish Policy

Japan’s potential move away from borrowing cost suppression is going to keep upward pressure on global interest rates along with rate hikes by the Bank of England and the European Central Bank.

Data released on Friday showed core consumer prices in Tokyo, a leading indicator of nationwide trends, rose 4.3% in January from a year earlier, marking the fastest annual gain in nearly 42 years.

US Data Backs Case for Fed’s Hawkish Stance

Helping to support the dollar against the Yen on Thursday was data that showed the U.S. economy maintained a strong pace of growth in the fourth quarter, backing the case for the U.S. Federal Reserve to maintain its hawkish stance for longer.

Gross Domestic Product increased at a 2.9% annualized rate last quarter, the Commerce Department said in its advance fourth-quarter GDP growth estimate. The economy grew at a 3.2% pace in the third quarter. Economists polled by Reuters had forecast GDP rising at a 2.6% rate.

US Core PCE Price Index Rises

The core personal consumption price expenditures index rose by 4.4% from a year ago in December, the Commerce Department reported Friday. That was in line with economists’ consensus estimate form Dow Jones. Including food and energy costs, inflation was up 5% on an annual basis.

After a string of lighter inflation readings lately, the data may have disappointed some traders. Still, the core inflation number does represent a slight slowdown from a 4.7% annual pace reported in the prior month.

Short-Term Outlook

Between Friday’s data and the GDP print, yields were higher last week, but down since highs notched late last year.

The data could impact the Fed’s next interest rate decision, which is expected at the conclusion of its next meeting on Feb. 1. Many investors are hoping for the central bank to slow the pace of interest rate hikes further and announce a 25 basis point increase then.