USD/JPY extends rally to February highs, focus shifts to Japan CPI and retail data

• USD/JPY surges above 154.00, up nearly 0.90%, marking its highest level since mid-February.
• Japanese Yen weakens broadly after the BoJ keeps interest rates unchanged at 0.50%.
• Fed Chair Jerome Powell adopts a cautious tone after delivering a 25 bps cut, boosting the US Dollar.

The Japanese Yen (JPY) slumps across the board on Thursday, with USD/JPY rallying to an eight-and-a-half-month high after the Bank of Japan (BoJ) left interest rates unchanged at 0.50%. At the time of writing, the pair is trading around 154.16, up nearly 0.90% on the day.

The BoJ has now held interest rates steady for five consecutive meetings, following a symbolic hike in January when the policy rate was lifted from 0.25% to 0.50%, the first increase in seventeen years. Thursday's decision reinforces the central bank's cautious approach as it navigates a fragile recovery amid external headwinds.

The decision was not unanimous. In a 7-2 vote, board members Naoki Tamura and Hajime Takata dissented in favor of a 25-basis-point (bps) hike to 0.75%. BoJ Governor Kazuo Ueda struck a cautious tone in his post-decision remarks, stating that the central bank wants to "take a little longer to see how US tariff impacts would affect the Japanese economy."

He added that policymakers would "continue to raise the policy rate if the economy and prices move in line with our forecast, in accordance with improvements." Ueda also emphasized the need to further examine wage growth prospects before committing to any additional tightening measures.

Looking ahead, traders will closely monitor a slate of Japanese economic data due Friday, which could influence expectations for the BoJ's final monetary policy meeting of the year on December 18-19. Key releases include the Tokyo Consumer Price Index (CPI), Unemployment Rate, Industrial Production, Retail Sales and seasonally adjusted Retail Trade figures. Based on current pricing, swap markets assign roughly a 25-30% probability of a rate hike at the December meeting.

Adding to the Yen's weakness, renewed buying interest in the US Dollar (USD) followed the Federal Reserve's (Fed) hawkish interest rate cut on Wednesday. While the Fed delivered a widely expected 25-basis-point reduction, Chair Jerome Powell emphasized that "a further reduction in the policy rate at the December meeting is not a foregone conclusion," reinforcing a data-dependent stance.

In response, the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, rallied to a three-month high, trading around 98.53 at the time of writing.