USD/JPY Price Forecast: Will the seven-week consolidation give way to a breakout?

With the US Dollar outperforming, USD/JPY remains near 159.00, retaining the previous day’s losses.
A larger December interest rate increase by the Fed has also emerged as a market expectation.
Thursday’s release of Japan’s October PPI figures is next on investors’ radar.

Dollar strength keeps the Japanese Yen (JPY) under pressure on Wednesday, leaving USD/JPY around 159.00, near its highest level in almost seven weeks. The US Dollar (USD) is outperforming amid concerns that the Federal Reserve (Fed) could opt for a larger interest rate increase at its December meeting, supporting the pair.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

At the time of writing, a 0.1% gain has taken the US Dollar Index (DXY) to around 102.32. The index measures the Greenback against a basket of six major currencies.

With inflationary pressures in the United States (US) accelerating in October, financial markets have begun factoring in a 50 basis points (bps) rate increase at the Fed’s December meeting.

How does the US inflation surprise complicate the Fed’s policy choices?

A fresh setback to the disinflation narrative is evident in the latest figures, according to economists at Rabobank, who observe that “yesterday’s US CPI print came in hotter than expected at 0.4% m-o-m headline vs. a consensus of 0.3% and 0.3% core vs. a 0.2% market view,” highlighting the renewed challenge to slowing price growth.

To illustrate the concern, Rabobank cites the “usually dovish Fed voter Goolsbee, ‘it’s another distressing report, borderline disturbing. We’ve been hoping to get progress.’” Rather than a further moderation in inflation, the bank identifies “an acceleration in grocery and food inflation, persistent housing/shelter price pressure, and a delayed pass-through from earlier energy shocks feeding into medical care, household furnishings, and other daily expenses,” developments that strengthen fears of stubbornly entrenched underlying price pressures.

Attention in Japan now turns to Thursday’s October Producer Price Index (PPI) release. Following September’s decline of 0.3% Month-on-Month (MoM), producer-level inflation is estimated to have risen by the same percentage in October.

USD/JPY Technical Analysis: Can the Pair Break Above 159.00?

A near-term bullish outlook remains intact on the daily chart, where USD/JPY is trading at 158.88, towards the top of a consolidation range that has lasted almost seven weeks. Spot remains above the 20-day Exponential Moving Average (EMA) of 158.10 and is pulling further away from this dynamic support. Meanwhile, the Relative Strength Index (RSI) is climbing within positive territory at 57.38, indicating that buyers remain in control without the market looking overstretched yet.

A decisive move above 159.00 would set up a fresh upward leg, with 160.00 and September’s high of 160.39 marking key resistance levels. On a pullback, the first support lies at the 20-day EMA of 158.10. A daily close below that level would signal waning upward pressure and point to a deeper correction towards 156.00, near the bottom of the consolidation range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Fed: Frequently Asked Questions

How do the Federal Reserve’s responsibilities affect the US Dollar?

Responsibility for US monetary policy rests with the Federal Reserve (Fed), whose twin mandates are price stability and full employment. Adjustments to interest rates are its main means of pursuing these objectives. If prices climb too rapidly and inflation exceeds its 2% target, the Fed increases interest rates. Higher borrowing costs across the economy make the US more attractive to international investors seeking to deploy funds, strengthening the US Dollar (USD). Conversely, inflation below 2% or an excessively high Unemployment Rate may prompt the Fed to cut rates to stimulate borrowing, putting pressure on the Greenback.

What is the frequency of the Fed’s monetary policy meetings?

At eight policy meetings each year, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) reviews economic conditions and determines monetary policy. Twelve Fed officials attend the FOMC: the Board of Governors’ seven members, the president of the Federal Reserve Bank of New York and four presidents drawn from the other eleven regional Reserve Banks. These four serve rotating one-year terms.

How does Quantitative Easing (QE) work, and what does it mean for USD?

When faced with extreme circumstances, the Federal Reserve may turn to Quantitative Easing (QE), a policy that sharply expands credit flows through a stalled financial system. This unconventional measure is deployed during crises or periods of exceptionally low inflation. During the Great Financial Crisis in 2008, it was the Fed’s preferred policy tool. Under QE, the Fed prints additional Dollars to purchase high-grade bonds from financial institutions, typically weakening the US Dollar.

How does Quantitative Tightening (QT) affect the US Dollar?

The reverse of QE, Quantitative tightening (QT) entails the Federal Reserve halting bond purchases from financial institutions and allowing its existing holdings to mature without reinvesting the principal in new bonds. This process generally supports the value of the US Dollar.