• Japan’s core inflation marked the second consecutive month of a slowing trend.

• The Bank of Japan will likely maintain ultra-low interest rates at next week’s meeting.

• The dollar geared up for its second consecutive weekly gain.

Friday unveils a bullish USD/JPY outlook as the yen softens amid weaker inflation figures. Despite Japan’s core inflation holding above the 2% central bank target in December, it marked the second consecutive month of a slowing trend. This further supports the expectation that the Bank of Japan will maintain its extensive monetary stimulus.

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Moreover, the data increases the likelihood that the Bank of Japan will maintain ultra-low interest rates at next week’s meeting.

Rabobank strategist Jane Foley remarked, “The market’s realization that rate hikes won’t be likely for the BOJ in the coming months and the reassessment of Fed rate cuts is already evident in the upward movement of the dollar/yen.”

However, analysts suggest that there is still steady service price increases. Moreover, there is a growing likelihood of substantial wage hikes. Therefore, these will likely sustain market expectations of a shift to rate hikes for the BoJ.

Meanwhile, the dollar geared up for its second consecutive weekly gain. This is due to signs of US economic resilience and a cautious stance on rate cuts. Traders reduced expectations of fast and big rate cuts in the US. Notably, the dollar index surged by 0.9% for the week. This made the yen the most significant loser, down 5% for the year. Data and a deadly earthquake in Japan have eroded confidence in the likelihood of the Bank of Japan raising rates.

USD/JPY key events today

• US Preliminary UoM Consumer Sentiment

USD/JPY technical outlook: Bullish strength wanes with bearish divergence above 148.25

On the technical side, the USD/JPY price has broken above the 148.25 key resistance level and is on its way to making a new high. However, the RSI is above 70, indicating an overbought market. Therefore, further upside movement might be limited. Moreover, the RSI already shows signs that bulls are weaker, above 148.25, as it has made a slight bearish divergence.

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If, indeed, bulls are weaker, then the price will struggle to reach the next resistance level at 150.02. At the same time, it might pull back to retest the 30-SMA before getting to the 150.02 resistance. Still, the bullish trend will continue if the price stays above the 30-SMA.

https://www.forexcrunch.com/blog/2024/01/19/usd-jpy-outlook-yen-weakens-as-japans-inflation-figures-ease/