Bulls pause for breather ahead of US PCE Price Index

• USD/JPY attracts some intraday sellers after stronger inflation figures from Japan.
• The risk-off mood and retreating US bond yields also benefit the lower-yielding JPY.
• The divergent Fed-BoJ outlook should limit losses ahead of the US PCE Price Index.

The USD/JPY pair retreats following an intraday uptick to the 158.00 neighborhood, or a five-month peak and continues losing ground through the early European session on Friday. As investors look past the Bank of Japan (BoJ) monetary policy update on Thursday, strong inflation data from Japan, along with the risk-off mood, benefits the safe-haven Japanese Yen (JPY) and exerts some pressure on the currency pair. The BoJ decided to keep the short-term rate target unchanged at the end of the December policy meeting and offered few clues on how soon it could push up borrowing costs. That said, a government report showed that Japan’s National Consumer Price Index (CPI) rose more than expected in November and keeps the door open for a potential rate hike in January or March. 

In fact, the Japan Statistics Bureau reported that the National CPI climbed 2.9% YoY in November compared to the 2.3% previous reading. Additional details revealed that the National CPI ex Fresh food arrived at 2.7% YoY versus 2.3% in October and was above the 2.6% market expectations. Moreover, CPI ex Fresh Food, Energy rose 2.7% YoY in November versus the 2.3% increase recorded in the previous month. This points to a sustained uptick in inflation and might force the BoJ to hike interest rates again early in 2025, which, in turn, provides some respite to the JPY bulls. Apart from this, the global flight to safety, amid the looming US government shutdown, drives some haven flows towards the JPY and drags the USD/JPY pair further below the 157.00 mark on the last day of the week. 

The US House of Representatives failed to pass A spending bill to fund the government on Thursday, raising the risk of a partial shutdown at the end of the day on Friday. This comes on top of persistent geopolitical risks and concerns about US President-elect Donald Trump’s tariff plans, which, in turn, tempers investors’ appetite for riskier assets and boosts demand for traditional safe-haven assets. The flight to safety triggers a modest pullback in the US Treasury bond yields, from a multi-month peak set on Thursday, and keeps a lid on the post-FOMC US Dollar (USD) rally to a two-year peak. This turns out to be another factor that contributes to the offered tone surrounding the USD/JPY pair. That said, the Federal Reserve’s (Fed) hawkish outlook should limit losses for the USD and the major. 

Traders might also refrain from placing aggressive bets ahead of Friday’s release of the US Personal Consumption Expenditure (PCE) Price Index, due later during the early North American session. The Fed’s preferred inflation gauge should provide a fresh impetus to the USD and drive the USD/JPY pair. Nevertheless, spot prices remain on track to register gains for the third successive week. Moreover, the aforementioned fundamental backdrop seems tilted firmly in favor of bullish traders and supports prospects for an extension of the recent well-established uptrend from the 148.65 region, or the monthly low touched on December 3.

USD/JPY daily chart

Technical Outlook

From a technical perspective, the intraday pullback could be attributed to some profit-taking amid a slightly overbought Relative Strength Index (RSI) on the daily chart. That said, the overnight strong move up beyond the previous multi-month top, around the 156.75 area, favors bullish traders. Hence, a strong follow-through selling is needed before confirming that the USD/JPY pair has topped out in the near term and positioning for deeper losses. 

In the meantime, any subsequent slide is likely to attract some buying and remain limited near the 156.00 mark. Some follow-through selling, however, might expose the next relevant support near the 155.50 horizontal zone, below which the USD/JPY pair could drop to the 155.00 psychological mark. The latter should act as a key pivotal point, which if broken decisively might shift the near-term bias in favor of bearish traders. 

On the flip side, the 157.45-157.50 area now seems to act as an immediate hurdle ahead of the 158.00 mark. A sustained strength beyond has the potential to lift the USD/JPY pair to the 158.45 hurdle en route to the 159.00 round figure. The momentum could extend further towards the 159.60-159.65 region, above which spot prices might aim to conquer the 160.00 psychological mark and climb further to the 160.20 hurdle, which coincides with the top end of a multi-month-old ascending channel.