The strong core consumer price index (CPI) and fourth quarter gross domestic product (GDP) data released last week, coupled with market expectations of wage growth driving consumption, have led investors to believe that the Bank of Japan may adjust monetary policy more aggressively than expected. Meanwhile, the Federal Reserve remains cautious about future interest rate cuts, while weak US economic data further weighs on the US dollar. However, the yield of Japanese government bonds (JGB) has fallen from a multi-year high, limiting the rise of the yen and causing a short-term rebound of the US dollar against the yen.

The expectation of the Bank of Japan raising interest rates is heating up, and the Japanese yen continues to strengthen

According to market research, Japan's latest core CPI hit a 19 month high in January, strengthening market expectations for the Bank of Japan to raise interest rates. In addition, the GDP growth in the fourth quarter exceeded expectations, reflecting signs of economic recovery in Japan. The market expects that sustained wage growth will further boost consumer spending, making it possible for the Bank of Japan to adjust its interest rate policy earlier than previously anticipated.

The improvement in Japanese economic data, coupled with the upward trend in wages, has strengthened market expectations that the Bank of Japan will soon end its negative interest rate policy. "- Analysis by market economists.

In addition, Bank of Japan Governor Kazuo Ueda stated last week that if long-term interest rates rise significantly, the central bank may increase its purchases of government bonds to curb abnormal market volatility. This statement caused the JGB yield to fall from its highest point since 2009 hit last week, putting some pressure on the yen and limiting its further upward potential.

Weak US economic data puts pressure on the US dollar

At the same time, multiple economic data released by the United States have performed poorly, further putting pressure on the US dollar: the initial value of the US S&P Global Composite PMI fell from 52.7 in January to 50.4 in February, indicating a slowdown in private sector economic activity expansion.

The University of Michigan Consumer Confidence Index plummeted from 71.7 to 64.7, the lowest level in 15 months, indicating a significant weakening of consumer confidence.

American households' expectations for inflation over the next year have risen to 4.3%, the highest level since November 2023, and their expectations for inflation over the next five years have reached their highest level since 1995 (3.5%).

In addition, the sales forecast of Wal Mart, a major US retailer, was disappointing, further triggering concerns about the slowdown in US consumer spending. Federal Reserve officials remain cautious about interest rate cuts while inflation remains sticky, which has led to a weakening trend in the US dollar. In addition, the market's expectation that the US government may adjust its trade policies has also brought some uncertainty to the market.

Although the market once expected the Federal Reserve to initiate interest rate cuts within the year, current inflation and economic data have kept policymakers on a wait-and-see attitude. "- Economist analysis.

From a technical perspective, the US dollar against the Japanese yen still faces downside risks in the short term, currently trading around 149.30, the lowest level since December last year. If the bearish power further strengthens, it may fall towards the 148.70 area (the low point in December 2024), and if it falls below this level, it may further decline.

Editor's viewpoint:

At present, market expectations for the Bank of Japan's monetary policy adjustment are heating up, which is providing support for the yen, while weak US economic data is putting pressure on the US dollar. However, fluctuations in Japanese government bond yields may affect the trend of the yen, and there is still some room for a short-term rebound of the US dollar against the yen.

From an overall trend perspective, as long as market expectations for the Bank of Japan's interest rate hike continue to rise, the US dollar against the Japanese yen may still face downward pressure, and the future trend will depend on the policy dynamics of the Bank of Japan and the Federal Reserve.