USDJPY rises to the highest level since July 2024 as snap election renewes fiscal fears

KEY POINTS:

• Japanese PM Takaichi weighs calling snap election to restore LDP majority
• US DOJ subpoena renewed Fed independence worries and weighed on the dollar
• Japanese data not pointing to any urgent action on monetary policy
• US CPI in focus today
• USDJPY rises to the highest level since July 2024

FUNDAMENTAL OVERVIEW

USD:

The US Dollar weakened
across the board yesterday following the news of the US
Department of Justice subpoenaing the Federal Reserve. The market saw the
move as another attack against Fed independence amid Trump’s calls to lower
interest rates faster.

A potential loss of Fed
independence increases the risk of uncontrolled inflation in the future and
currency debasement. The probability of the loss of Fed independence though remains
very low as the consequences would be too big not only for the US but the
global economy as a whole. So, for now it’s just noise, but the market will
keep an eye on that risk.

Today, we have the US CPI report,
and it could be a major market-moving release. A hot report will likely trigger
some hawkish repricing in interest rate expectations and support the US Dollar.
On the other hand, soft data should keep the market on expecting at least two
rate cuts by the end of the year potentially weighing on the greenback.

JPY:

On the JPY side, we got
reports on Friday that Japanese
PM Takaichi was considering dissolving the lower house and calling a snap
election in February to restore her LDP majority given the high approval
rating. This would potentially give her more leeway on policy.

The Japanese Yen weakened
following the reports and, after a brief consolidation, resumed the fall
despite continuous verbal intervention from Japanese officials. Moreover, the economic
data hasn’t been pointing to any urgent action from the BoJ. The latest wage data disappointed and the Tokyo CPI in December was softer than
expected. Inflation has been hovering above the BoJ’s 2% target but never showed
concerning developments.

The central bank is still
placing a great deal on wage growth, so wage data and spring wage negotiations
remain key. The market is pricing around 40 bps of tightening by year end. The
outlook for the JPY remains bearish.

USDJPY TECHNICAL
ANALYSIS – DAILY TIMEFRAME

On the daily chart, we can
see that USDJPY eventually extended the rally into the 158.87 level. This is
where we can expect the sellers to step in to position for a drop back into the
154.50 support. The buyers, on the other hand, will want to see the price
breaking higher to increase the bullish bets into the 161.95 level next.

USDJPY TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME

On the 4 hour chart, we can
see that we have an upward trendline defining the bullish momentum. If we get a
pullback into the trendline, we can expect the buyers to lean on it with a
defined risk below it to keep targeting new highs. The sellers, on the other
hand, will look for a break lower to pile in for a drop into the 154.50 support
next.

USDJPY TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME

On the 1 hour chart, we can
see that we have another minor upward trendline defining the bullish momentum
on this timeframe. From a risk management perspective, the buyers will have a
better risk to reward setup around the trendline to keep pushing into new
highs, while the sellers will 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 CATALYSTS

Today we have the US CPI report. Tomorrow, we get the November US Retail
Sales and US PPI reports, so it’s going to be old data. We also have a
potential US Supreme Court decision on Trump’s tariffs tomorrow. On Thursday,
we get the latest US Jobless Claims figures.