The USD/JPY pair retreated from its highs. At the end of Tuesday's session, the price jumped by 165 pips (Tuesday's low was at 149.25, and the high was at 150.90), but buyers hesitated to breach the 151 figure. Nevertheless, the pair maintains a bullish bias as "dovish expectations" on the Federal Reserve's actions are getting weaker. Therefore, the pair has a chance of testing the 151.00 target.
After surging on Tuesday, the US Dollar Index showed mixed dynamics on Wednesday. After reaching a three-month high (104.87), the index did not approach the 105 figure. Instead, it drifted. The pause affected all major dollar pairs, and USD/JPY is no exception.
However, in my opinion, this is a temporary delay. The pair has been showing a clearly defined upward movement for six consecutive weeks, and there are currently no grounds for a trend reversal. On the contrary, the inflation data paved the way for the pair to move towards record highs around the 152 figure (more precisely, it approached this area at 151.96).
The US inflation data showed that the pace of decline in CPI slowed down in January. All components of the data were in the green zone, making it possible for dollar bulls to go on the offensive on all fronts. It can be said that the January figures largely predetermined the results of the May FOMC meeting. For instance, in the overnight index swap (OIS) market, only a 10 basis point rate cut in May is currently priced in (at the end of January, the market forecasted 33 bps). Investors pegged a 32% chance that the Fed would cut rates at their meeting in May, according to CME Group's FedWatch tool. However, on Tuesday morning (before the inflation report was released), this was 55%. The likely date for the first rate cut has shifted again – now to June. However, the June prospects for a 25 basis point rate cut are also very uncertain, considering that several CPI reports and labor market reports will be published before that.
It is worth noting that the market has already played out the most likely outcomes of the March meeting ahead of time (thanks to which the USD/JPY pair rose from 144.20 to the borders of the 149 figure). Therefore, any mention of the Fed maintaining the status quo in March, as they say, does not "fuel" market participants. But when it comes to the next (May) meeting, the market wakes up. Over time, this fundamental factor will exhaust itself – for instance, if February Non-Farms turn out to be as strong as January's (in which case the likelihood of a rate cut in May will decrease to 20-15%). By then, the focus will shift to June, and another round of discussions will start – will the Fed decide on the first rate cut or not?
In other words, if inflation in the U.S. continues to show growth or stagnation, and the labor market shows signs of "overheating," the date of the first rate cut will continue to change. Recall that at the end of December, the market was almost certain that the Fed would begin cutting rates in March (the probability of this scenario was estimated at almost 80%). In January, the market revised its forecasts – the focus was on the May meeting. Now the focus is gradually shifting to June.
The U.S. dollar benefited from this situation.
In turn, the yen obediently follows the greenback due to its weak position. The Bank of Japan continues to voice dovish comments, exerting pressure on the national currency. For instance, BOJ Governor Kazuo Ueda said that the chances of maintaining an accommodative policy stance are very high, "even if it moves to end its negative interest rate." His deputy, Shinichi Uchida, expressed a similar position. According to him, the central bank plans to maintain "a stable, accommodative monetary environment."
All this indicates that the USD/JPY pair retains the potential for further growth. But the margin of safety is not that great: there is a conditional "red line" around the 152 figure for Japanese authorities. No trader has stepped foot beyond that line. Recall that in 2023, the pair hit a yearly high (151.92) and reversed, apparently remembering that at the level of 151.96, Japan intervened in the currency market three times in 2022—resulting in a massive currency intervention that strengthened the yen by several thousand points. A similar scenario could repeat itself this year. We have already heard corresponding signals from the Japanese government.
For instance, Vice Minister of Finance for International Affairs (top currency diplomat) Masato Kanda said on Wednesday that the "recent currency moves are rapid." In this context, he warned that authorities will take appropriate actions on foreign exchange if necessary.
Such messages cannot be ignored. Therefore, speaking about more or less safe price targets, we can only highlight two —151.10 (the upper line of the Bollinger Bands indicator on the 4-hour chart) and 151.50. Above this is an area of increased (maximum) risk. When approaching or testing the 152 figure, Japanese authorities may conduct (and are likely to conduct) a currency intervention, causing the yen to strengthen by several hundred points "in a moment." Therefore, it is advisable to take profits and adopt a wait-and-see position in this price area.