20.12.202413:06 Forex Analysis & Reviews: USD/JPY. Analysis and Forecast

Today, the USD/JPY pair is retreating from its five-month high. Investors appear to be disregarding the monetary policy update from the Bank of Japan (BoJ) released yesterday, Thursday. At its end-of-December meeting, the BoJ decided to leave the short-term interest rate unchanged. However, the Bank provided little guidance on how soon it might shift toward raising borrowing costs. Meanwhile, a government report indicated that Japan's Consumer Price Index (CPI) grew more than expected in November, potentially paving the way for an interest rate hike as early as January.

According to Japan's Statistics Bureau, the national CPI rose by 2.9% year-on-year in November, up from the previous 2.3%. Additionally, the national CPI excluding fresh food rose by 2.7% year-on-year, surpassing both October's figure of 2.3% and market expectations of 2.6%. Moreover, the CPI excluding fresh food and energy also rose 2.7% year-on-year, compared to 2.3% in the prior month. These indicators suggest that persistent inflationary growth could compel the BoJ to raise interest rates again in early 2025. Consequently, such data provides some support to Japanese yen bulls.

Adding to the yen's strength, the global flight to safety driven by the looming U.S. government shutdown has diverted some safe-haven flows toward the Japanese currency. This has pulled the USD/JPY pair below the critical 157.00 level on the last trading day of the week.

Yesterday, the U.S. House of Representatives failed to pass a spending bill to fund the government, intensifying geopolitical risks and concerns over the tariff plans of President-elect Donald Trump. This has dampened investor appetite for riskier assets, boosting demand for traditional safe-haven assets. The flight to safety has also led to a modest decline in U.S. Treasury yields from their multi-month highs reached on Thursday, further capping the U.S. dollar rally following the Federal Open Market Committee (FOMC) meeting. These factors contribute to the soft tone in the USD/JPY pair. However, the Federal Reserve's hawkish outlook is likely to limit the dollar's losses against major currencies.

Traders may refrain from taking aggressive positions ahead of Friday's release of the U.S. Personal Consumption Expenditures (PCE) Price Index, due during the early North American session. As the Fed's preferred inflation measure, the PCE data is expected to provide fresh impetus for the dollar and potentially push the USD/JPY pair higher. Despite today's pullback, the spot price remains on track for its third consecutive weekly gain. Furthermore, the underlying fundamentals strongly favor dollar bulls, supporting the outlook for the continuation of the pair's recent uptrend from the 148.65 region, a monthly low reached on December 3.

The Relative Strength Index (RSI) on the daily chart is nearing overbought territory. This indicates that traders should exercise caution and avoid aggressive buying at current levels. However, the broader market environment continues to favor an upward trajectory for the USD/JPY pair in the medium term.