Resilient Dollar or hawkish BoJ: Which will dominate USD/JPY this week?

As the USD/JPY currency pair enters a high-stakes week, the tug-of-war between a robust US dollar and the potential for a hawkish shift by the Bank of Japan (BoJ) takes center stage. Traders are closely analysing economic indicators from both nations to determine which will tip the scales in this closely watched battle. With critical data on the horizon, the stage is set for a week of volatility and opportunity.

Japan’s economic signals: BoJ at a crossroads

The spotlight is on Japan as the Jibun Bank Services PMI for December offers fresh insights into the economy. Finalized at 50.9, the PMI marks a slight improvement from November’s 50.5, although it falls short of the preliminary figure of 51.4.

Source: Trading economics

The data underscores a steady rise in service-sector prices and continued employment growth, both of which bolster the case for a potential BoJ rate hike in January. Bank of Japan Governor Kazuo Ueda has repeatedly stressed the importance of sustained inflation and wage growth, viewing them as critical benchmarks for any policy shift.

The BoJ has long maintained its ultra-loose monetary policy, prioritizing inflation above 2%. However, market dynamics are shifting. Rising service-sector inflation and improving labor market conditions have fueled expectations of a 0.25% rate hike, with markets assigning a 55% probability to this outcome at the January meeting.

Divisions among BoJ policymakers highlight the complexity of the decision, as some advocate for immediate action while others caution against hasty moves amid lingering uncertainties around global and domestic factors.

US Dollar strength: A challenge for the Yen

On the other side of the Pacific, the US dollar remains buoyed by robust economic data. The preliminary S&P Global Services PMI for December surged to 58.5 from 56.1 in November, signaling a strong performance in the US services sector. This resilience reflects broader economic strength, reinforcing the Federal Reserve’s hawkish stance and keeping US Treasury yields elevated.

Source: Trading economics

The finalised US Services PMI, due later this week, is likely to affirm this momentum, further bolstering the dollar’s position. Rising Treasury yields have placed additional pressure on the yen, with the 10-year yield nearing seven-month highs. The Fed’s commitment to tackling inflation has dampened speculation of a near-term rate cut, with only an 11% probability of such a move in January, according to the FedWatch tool.

Which force will prevail?

The USD/JPY pair’s direction hinges on a delicate balance between Japan’s potential monetary policy shift and the unrelenting strength of the US dollar. Japanese authorities are carefully weighing the implications of a rate hike, as sustained inflation and wage growth become more apparent. Meanwhile, the US dollar continues to draw strength from an economy that shows little sign of slowing down.

As traders await finalised data from both nations, volatility in the USD/JPY pair is almost guaranteed. For those monitoring the pair, this week represents a unique intersection of economic narratives and market sentiment. Will the BoJ’s signals be strong enough to lift the yen, or will the resilient dollar maintain its upper hand?

The coming days will provide answers, shaping not only the USD/JPY’s trajectory but also offering broader insights into the global economic landscape. Stay tuned for real-time updates and expert analysis as this critical story unfolds.

At the time of writing USD/JPY is holding around the 157.05 price level. The daily candle reflects strong selling pressure,  with the RSI pointing down around the midline. However with prices remaining above the 100-day moving average, and edging down towards the buy zone, there is a case for a potential bounce.

Buyers could find resistance at the 157.54 and on the downside, sell pressure could be held at the 156.91 and 156.25 support levels.

Source: Deriv X