BoJ Chatter Sends Mixed Messages, USD/JPY Softer Ahead of US CPI

USD/JPY News and Analysis

• Busy week ahead of anticipated year end slump
• BoJ chatter creates confusion as markets seesaw ahead of US CPI
• BoJ aware not to surprise the market, communication is key
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Busy Week Ahead of Anticipated Year End Slump

This week is a massive one as 3 major central banks are due to provide updates on monetary policy and some are due to release economic forecasts (Fed, ECB). Today, US CPI is a major catalyst that can influence market direction. If US CPI comes in lower than expected, the recent USD/JPY sell-off is likely to continue.

The Fed will then provide an update on its views regarding inflation, growth, the Fed funds rate and unemployment. It is anticipated that the Fed will once again look to avoid dovish language as inflation is yet to meet the 2% target but has made solid progress this year. The Bank of Japan (BoJ) will only meet next week Tuesday and markets will definitely turn their attention to any further mentions of what a policy pivot may look like. This week’s data could determine the direction of travel for FX markets heading into the end of the year where trading typically slows down during the Christmas period.

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BoJ Chatter Creates Confusion as Markets Seesaw Ahead of US CPI

USD/JPY dropped on Thursday last week after comments from senior BoJ officials led markets to believe that a decision on walking away from negative interest rates was likely to be decided sooner than expected. In the days thereafter, the BoJ has commented that the committee see little need to end negative rates in December, causing traders to pull back bets on a stronger yen.

146.50 is the current level of resistance with 145 immediate support. Thereafter, the 200 SMA and 141.50 levels could come into play. With plenty of high importance event risk this week, we may be about to embark on a period of choppy and volatile moves across the FX space, necessitating a focus on risk management.

USD/JPY Daily Chart

Source: TradingView, prepared by Richard Snow

The bond market has contributed to some of the recent USD/JPY volatility, as a sharp spike higher has turned lower over the last three days. Stepping away from negative interest rates has the potential for massive ramifications throughout global markets, necessitating further communication from officials. The challenge with this sensible approach is around navigating the temptation to mention specifics or timelines as to when this eventual policy shift will take place. This week however, the focus is on the US ahead of CPI and the FOMC meeting. US retail sales should also be noted as far as it refers to the health of the US consumer – something that has buoyed the local economy.

Japanese Government Bond (10 year)

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX