USD/JPY dropped below 155 in early trading on Monday, February 23, as traders considered the prospect of monetary policy divergence and government policies. Traders should closely monitor central bank rhetoric and US and Japanese government policy announcements throughout the session. US economic indicators will also influence US dollar demand.
Despite key economic indicators shifting sentiment toward BoJ and Fed rate paths, expectations of eventual BoJ rate hikes and Fed rate cuts continue to support the bearish medium-term outlook for USD/JPY.
Below, I’ll discuss the macro backdrop, near-term price catalysts, and technical levels traders should closely watch.
Last week, Japanese inflation figures signaled a marked cooling in headline inflation, challenging expectations of an April BoJ rate hike. The annual inflation rate tumbled from 2.1% in December to 1.5% in January, while core inflation fell from 2.4% to 2.0%, the BoJ’s target rate.
However, the so-called ‘core-core’ inflation rate eased from 2.9% to 2.6%, holding well above the Bank’s 2% target rate. Core-core inflation aligns with the view that the drop in headline inflation may be attributed to temporary factors, such as lower energy prices. Typically, the ‘core-core’ inflation rate carries more weight with policymakers, keeping an April rate hike on the table.
Crucially, services sector activity and inflation bolstered the case for an April hike. The S&P Global Japan Services PMI increased from 53.7 in January to 53.8 in February. Furthermore, service providers indicated a pickup in expenses and a sharper rise in selling prices.
These trends suggest a pickup in inflationary pressures, supporting a more hawkish BoJ policy stance. The services sector accounts for roughly 70% of Japan’s GDP, and BoJ Governor Kazuo Ueda has previously warned of the Bank’s focus on the sector’s price trends.
