The USD/JPY exchange rate has hovered at its highest level since July 17, after the latest Japanese wage income data. The pair, which is the third most popular forex cross, traded at 158.05, up by 13.25% from its lowest point in September 24. So, what next for the USD to JPY price ahead of the US NFP data?
Japan wage income data
According to Japan’s statistics agency, the average wage income data jumped from 2.2% in October to 3.0% in November.
Another report showed that the overtime pay rose from 0.70% to 1.60. These are important numbers because wages often has an impact on inflation, which then impacts the central bank’s decision.
The rising wages mean that Japan’s inflation may remain high in the coming months. Recent data showed that Japan’s inflation rose from 2.3% in October to 2.9% in November, the highest increase in three months. That figure was much higher than the Bank of Japan’s target of 2.0%.
Therefore, the strong wage numbers, high inflation rate, and the falling yen means that the Bank of Japan (BoJ) may continue to diverge from the Federal Reserve.
The BoJ raised interest rates twice in 2024, helping it exit negative rates. It pushed the benchmark rate to 0.25%, the highest number in years.
Therefore, there are rising odds that the bank will continue hiking interest rates later this year. Analysts see it hiking by 0.25% either in the January 24 meeting or later this year.
The main hindrance to BoJ hikes is Japan’s economy. A report released last month showed that the country’s GDP expanded by 0.7% in Q3, and analysts expect it to grow by 0.4% this year.
High interest rates hurts an economy by making the cost of borrowing capital for consumers and businesses higher.
Federal Reserve minutes
The USD/JPY pair also reacted to Wednesday’s Federal Reserve minutes. These minutes provided more details about last month’s meeting in which officials had a hawkish tilt.
Fed officials are mostly concerned about inflation, which may increase soon after Donald Trump becomes president. Trump has made many promises, including raising tariffs on goods entering the US.
Fed officials expect to deliver just two interest rates cuts this year instead of the previous four. And analysts anticipate that the first cut will happen in July this year.
The next important USD/JPY news will be the upcoming US nonfarm payrolls (NFP) data scheduled on Friday. While these numbers are important, their impact on the greenback may be muted since the Fed now focuses on inflation.
Economists expect the upcoming data to show that the economy added over 150k jobs in December, while the jobless rate remained at 4.2%. ADP’s report released on Wednesday showed that the private sector added just 122,000 jobs, lower than expected. Another report on Tuesday showed that job vacancies increased to over 8 million in November, the highest level in months.
USD/JPY technical analysis
USD/JPY chart by TradingView
The daily chart shows that the USD to JPY exchange rate has been in a tight range in the past few days. It has constantly remained slightly above the important support level at 156.78, its highest swing on November 5.
The pair has moved above the 78.6% Fibonacci retracement level and the 50-day moving average. It has also formed a bullish flag pattern, often leading to a strong bullish breakout. Therefore, barring any interventions by the Bank of Japan, there is a risk that the USD/JPY pair will have a strong bullish breakout as buyers target the psychological point of 160.
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