Japanese Yen receives support from odds of BoJ raising rates following Tokyo CPI

• The Japanese Yen gains ground as traders expect the BoJ to deliver an interest rate hike in January.
• Japan's Jibun Bank Manufacturing PMI reached 49.6 in December, exceeding the expected 49.5 and prior 49.0 readings.
• The US Dollar remains subdued as US Treasury yields decline, with the 2- and 10-year at 4.32% and 4.62%, respectively.

The Japanese Yen (JPY) remains stronger against the US Dollar (USD) on Monday. The USD/JPY pair remains subdued as the Japanese Yen (JPY) strengthens on the likelihood of the Bank of Japan (BoJ) raising interest rates in January following the release of Tokyo Consumer Price Index (CPI) inflation data last week.

Japan's Jibun Bank Manufacturing PMI reached 49.6 in December, slightly exceeding the flash estimate of 49.5 and improving from 49.0 in November. Although it marked the highest level since September, it still signaled the sixth consecutive month of declining factory activity.

The Nikkei 225 fell to around 39,950 on Monday, snapping two days of gains. The decline came after a slight drop in US futures, following Friday's Wall Street slump driven by rising Treasury yields and indications of more restrained interest rate cuts in 2025.

Japanese Yen holds minor gains as US Dollar edges lower amid subdued Treasury yields

• The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against its six major peers, trades around 108.00. The Greenback faces challenges as US Treasury bond yields depreciate on Monday. 2-year and 10-year yields stand at 4.32% and 4.62%, respectively, at the time of writing.
• The US Dollar may gain support from growing expectations of fewer rate cuts next year by the US Federal Reserve (Fed). Traders continue to digest the Fed's hawkish pivot. The Fed cut its benchmark interest rate by a quarter point at the December meeting, and the latest Dot Plots indicated two rate cuts next year.
• The headline Tokyo CPI inflation rose to 3.0% YoY in December, up from 2.6% in November. Meanwhile, the Tokyo CPI excluding Fresh Food and Energy increased to 2.4% YoY in December, compared to 2.2% the previous month. The Tokyo CPI excluding Fresh Food also climbed 2.4% YoY in December, slightly below the expected 2.5% but higher than the 2.2% recorded in November.
• On Friday, Japan's Finance Minister Katsunobu Kato said that he recently saw one-sided and sharp foreign exchange (FX) moves. Kato further stated that the official will take suitable measures against excessive foreign exchange movements.
• The Bank of Japan (BoJ) released the Summary of Opinions from its December monetary policy meeting on Friday, highlighting plans to adjust easing measures if economic conditions align with expectations. One BoJ board member emphasized the importance of monitoring wage negotiation momentum, while another stressed the need for scrutiny of data to determine any changes to monetary support.
• The Bank of Japan October meeting Minutes released this Tuesday reiterated the possibility of gradual rate hikes if inflation trends align with expectations, with a potential path to 1.0% by late fiscal 2025. The Minutes also emphasized a cautious approach to monetary policy, wage-driven economic growth amid domestic and global uncertainties, and fiscal measures to counter deflationary pressures.
• Earlier in the month, BoJ Governor Kazuo Ueda said that the central bank expects the Japanese economy to move closer to sustainably achieving the BoJ's 2% inflation target next year. Ueda also added, "The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward."

Technical Analysis: USD/JPY remains subdued below monthly highs near 158.00

The USD/JPY pair trades near 157.80 on Monday, maintaining its bullish momentum within an ascending channel on the daily chart. The 14-day Relative Strength Index (RSI) hovers just below the 70 level, supporting the bullish trend. However, if the RSI surpasses the 70 mark, it could indicate an overbought condition, potentially triggering a downward correction.

On the upside, the USD/JPY pair may retest its monthly high of 158.08, reached on December 26. A decisive break above this level could pave the way for further gains, with the pair potentially targeting the ascending channel's upper boundary near 160.60.

The immediate support lies at the nine-day Exponential Moving Average (EMA) around 156.79, closely aligned with the ascending channel's lower boundary near 156.50.

USD/JPY: Daily Chart