The Road to Exiting Negative Rates: A Deep Dive into the Factors Influencing USD/JPY

The Road to Exiting Negative Rates: A Deep Dive into the Factors Influencing USD/JPY

Bank of Japan Governor Kazuo Ueda recently discussed the blueprint for exiting negative rates, shedding light on two focal points: wage growth and the services sector. The Jibun Bank Services PMI unexpectedly increased from 51.5 to 52.7 in January. This significant growth indicates a noteworthy rise in input prices and hiring among service sector firms. Given these developments, it’s crucial to consider the Bank of Japan’s comments about the PMI numbers and how they may affect buyer demand for the USD/JPY.

While Japan lacks economic indicators for investors to consider on Thursday, attention will turn to the US GDP numbers for Q4 and the weekly jobless claims. Economists predict a quarter-on-quarter expansion of 2.0% in the US economy for Q4, following a robust growth rate of 4.9% in the previous quarter. However, if the GDP numbers disappoint and suggest softer-than-expected growth, bets on a March Fed rate cut may be reignited. The devil lies in the details, as downward trends in disposable income, consumer spending, and inflation would further increase the likelihood of a March rate cut. Investors will closely scrutinize the GDP Report for insights into consumption and inflation but must bear in mind that US labor market economic indicators remain pivotal for the Fed.

Tighter conditions in the US labor market could provide the Fed with the opportunity to delay rate cuts until Q2. Improved labor market conditions would support wage growth and disposable income, fueling consumer spending and demand-driven inflation. On the other hand, a higher-for-longer Fed rate path could potentially reduce disposable income and curb consumer spending. Therefore, it is vital to monitor the trends in US initial jobless claims, which are expected to increase from 187k to 200k in the week ending January 20. If the claims remain below 210k, they are unlikely to raise bets on a March rate cut.

The near-term outlook for the USD/JPY hinges on the prospects of US consumption and US inflation. Better-than-expected US GDP numbers, combined with a tight labor market and stable US inflation, could tilt the monetary policy in favor of the US dollar. However, there is a looming risk of a sharp correction for the USD/JPY if US inflation significantly softens. Nonetheless, currently, the USD/JPY remains in a bullish territory, sitting above the 50-day and 200-day exponential moving averages (EMAs) and affirming bullish price signals. A breakout from the 148.405 resistance level would bring the 150.201 resistance level into play.

Bank of Japan, US GDP, and US Jobless Claims: The Trifecta to Watch

On Thursday, investors should pay close attention to the Bank of Japan’s statements, the US GDP numbers for Q4, and the weekly jobless claims. A drop below the 147 handle would support a fall to the 146.649 support level. If that level is breached, the bears would be required for a run at the 50-day EMA. Finally, the 14-day Relative Strength Index (RSI) at 60.06 indicates a potential USD/JPY break above the 148.405 resistance level before entering overbought territory. Keeping these factors in mind will be crucial for making informed decisions regarding the USD/JPY pair.

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