Will the USD/JPY move beyond the 152 level and stay above?

The decrease in inflation within the United States over the past year has prompted the Federal Reserve (Fed) to consider concluding its cycle of rate hikes and to prepare the markets for potential rate cuts.

On Tuesday the 13th, the American Dollar (USD) received a boost from inflationary pressures in the United States that surpassed expectations. The Consumer Price Index (CPI) surged to 3.1% year-on-year in January, exceeding market projections and reinforcing the idea that the Fed is not yet ready to implement interest rate cuts.

Consequently, these statistics, indicating a less-than-expected moderation in US inflation, have led investors to reassess their expectations regarding the timing of the first rate cut later this year. According to the FedWatch tool by the CME Group, only 8.5% of investors currently anticipate a rate cut in the range of 500-525 basis points in March 2024, compared to 34% in May and 53.1% in June.

With a more hawkish stance on the release of inflation data, the USD has surged against its major counterparts, propelling the USD/JPY currency pair up by 0.88% to 150.879 at its peak, nearing its previous high of 151.903 reached on November 13, 2023, and its all-time high of 151.939 reached on October 21, 2022. This also marks the first time the currency pair has breached the psychological level of 150 since last November 2023.

In addition to economic data supporting the Fed's "longer for higher" stance on interest rates, the Bank of Japan (BoJ) has refrained from increasing its interest rates, while other central banks have over the last few years to combat inflation, indicating that the country is still adhering to an ultra-accommodative monetary policy. 

This divergence in monetary policy and the rate differentials are likely to exert upward pressure on the USD/JPY Forex pair, although short-term interventions by the BoJ to support the JPY cannot be ruled out. According to Reuters, BoJ policymakers were discussing changes in their monetary policy in their January meeting, especially about exiting the negative interest rates and reducing their stimulus programme, which might influence the dynamics between the JPY and the USD if significant changes were to be made in Japan.

The ActivTrades traders' community is currently 61% engaged in long positions, signifying their anticipation of a rise in the currency pair, as indicated by the Sentiment indicator on the left side of the chart. This tool can be integrated into trading routines to help traders open positions in the right direction and avoid going against the main trend.

Daily USD/JPY Chart - Source: Online trading platform from the broker ActivTrades

Upcoming news that may have an impact on the pair in February

•    Monthly US core retail sales & retail sales
•    Empire State Manufacturing
•    Unemployment claims
•    Monthly US core PPI & PPI
•    US prelim UoM consumer sentiment
•    US prelim UoM inflation expectations
•    FOMC meeting minutes
•    Flash manufacturing & services PMI
•    CB consumer confidence
•    Quarterly prelim GDP
•    Monthly US core PCE price index
•    Japanese prelim GDP
•    Japanese trade balance
•    Japanese national yearly core CPI
•    Bank of Japan yearly core CPI
•    Japanese unemployment rate
•    Japanese final manufacturing PMI

What to focus on when trading the USD/JPY currency pair

When determining the potential rise or fall of a currency pair in the Forex market, the regulated broker ActivTrades emphasizes the importance of considering the interest rate differential between the two countries, as it is what mostly drives the demand of a specific currency. 

When interest rates are higher, the demand for the associated currency typically rises because it provides a higher return on investment. Conversely, in a lower interest rate environment, the appeal of a particular currency diminishes as it offers a lower return compared to other currencies. 

This dynamic often influences investors' decisions and can impact currency valuations accordingly. Therefore, traders and investors should closely monitor any economic news and pertinent data crucial for the Federal Reserve and the Bank of Japan to assess the need for adjustments in their monetary policy. 

Because inflation has been quickly and strongly rising in the last few years, forcing most central banks around the world to increase their key interest rates, inflation figures (CPI, Core CPI, PCE, PPI, salary inflation…) will have the strongest impact, alongside employment and growth figures (GDP, unemployment rate, JOLTS, NFP report, participation rate…). 

Variations in the dovish or hawkish tone of officials' speeches can also provoke substantial movements in the Forex market (as well as other financial markets for that matter) if they differ from what market participants were expecting. Additionally, traders should also have a look at the numerous elections that will occur this year (including in the United States), geopolitical tensions, the dynamics of US-China relations, and overall investment sentiment.

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