key points:
- Japanese Prime Minister Takaichi is considering calling snap elections to restore LDP majority
- US DOJ subpoena renews Fed independence concerns and puts pressure on the dollar
- Japanese data points to no immediate action on monetary policy
- US CPI in focus today
- USDJPY reaches highest level since July 2024
fundamental overview
USD:
The US dollar weakened across the board yesterday after the news that the US Justice Department would subpoena the Federal Reserve. The market saw the move as another attack against the Fed’s independence amid Trump’s calls to sharply lower interest rates.
The potential loss of the Fed’s independence increases the risk of uncontrolled inflation and currency devaluation in the future. However, the possibility of the Fed losing its independence is very unlikely as the consequences would be huge not only for the US but for the entire global economy. So, it’s just noise for now, but the market will keep an eye on that risk.
Today, we have the US CPI report, and it could be a major market-changer release. A warmer report will likely lead to some drastic recalibration of interest rate expectations and support the US dollar. On the other hand, the soft data should keep the market expecting at least two rate cuts by the end of the year, which would potentially weigh on the greenback.
US Core CPI YTD
JPY:
On the JPY side, we received reports on Friday that Japanese PM Takaichi was considering dissolving the lower house and calling snap elections in February to restore his LDP majority given high approval ratings. This would potentially give it more leeway on policy.
Japanese PM Takaichi
The Japanese yen weakened following the reports and, after a brief consolidation, resumed falling despite continued verbal intervention from Japanese officials. Furthermore, economic data is not pointing to any immediate action from the BOJ. The latest wages data disappointed and Tokyo CPI in December was softer than expected. Inflation has been hovering above the BOJ’s 2% target but has never appeared in relation to growth.
The central bank is still paying close attention to wage growth, so wage data and spring wage talks remain important. The market is pricing in about 40 bps of tightening by the end of the year. The outlook for the JPY remains bearish.
USDJPY Technical Analysis – Daily Time Frame
USDJPY – Daily
On the daily chart, we can see that USDJPY eventually extended the rally to the 158.87 level. This is where we can expect sellers to position for a retracement to the support level of 154.50. On the other hand, buyers would like to see the price break higher to increase bullish bets towards the next 161.95 level.
USDJPY Technical Analysis – 4 Hour Time Frame
USDJPY – 4 hours
On the 4-hour chart, we can see that we have an upward trend line defining bullish momentum. If we get a retracement into the trendline, we can expect buyers to rely on it with a defined risk below it to target new highs. On the other hand, sellers will look for a break lower to pile up for a drop to the 154.50 support next.
USDJPY Technical Analysis – 1 Hour Time Frame
USDJPY – 1 hour
On the 1 hour chart, we can see that we have another small upward trend line defining bullish momentum on this time frame. From a risk management perspective, buyers would be better off risk rewarding setups around the trendline to push to new highs, while sellers would look for a break lower to target the next trendline around the 157.00 handle. The red lines define the average daily range for today.
upcoming catalyst
Today we have the US CPI report. Tomorrow, we get the November US Retail Sales and US PPI reports, so this will be old data. We also have a potential US Supreme Court decision on Trump’s tariffs tomorrow. On Thursday, we will get the latest US jobless claims data.
