The pair had recorded its worst week in twenty-four years earlier in November, following the soft US CPI inflation report, which had sparked a USDOLLAR selloff and a moderation in market expectations around the Fed’s tightening path.
Since then we have seen some policy makers hinting to a smaller rate hike next month, after a four consecutive outsized 75 basis points moves, while others appeared reluctant to slowdown. Overall though, most officials have insisted on the need for further tightening and for staying in restrictive territory.
Ms Mester (voter this year) told CNBC yesterday that a slowdown in the pace of increases “make sense”but added that they are “still going to raise the funds rate” . CME’s FedWatch Tool projects an 0.5% hike in December and assigns the highest probability to a terminal rate of 5.25%, after the recent climb-down to 5.00%.
In any case, the policy differential between the Fed and the Bank of Japan remains unfavorable for the pair, as the latter is on the far dovish side of the policy spectrum, with negative rates and yield curve control. The BoJ has not shown any inclination to change tack so far, even though inflation has been above its 2% since April. Friday’s latest release showed that CPI ex-fresh food jumped 3.6% y/y in October – the highest level since 1982.
Poor sentiment due to fears around China’s Covid-19 situation sent flows to the greenback, helping USD/JPY extend last week’s recovery on Monday. It now has the opportunity to take out the 143.11-60 resistance area, comprising of the 38.2% Fibonacci from October’s multi-decade high to this month’s lows drop. This could open the door for a larger advance that will bring 148.83 in the spotlight, but we are cautious around such moves.
USD/JPY is soft today and remains in a perilous state, running a bad month. As long as it does not clear the 38.2% Fibonacci, it is susceptible to renewed pressure and fresh monthly lows (137.65), although bears would need a fresh catalyst for that.