USD/JPY Outlook:
USD/JPY is likely to increase as it is trading above its recent average and near recent highs. Supporting this view is the strengthened US dollar driven by unexpected producer price inflation, which suggests interest rates may remain stable longer.
Key drivers:
• Rate gap: The Federal Reserve is expected to maintain rates longer, while the Bank of Japan is contemplating a shift from its ultra-loose policy.
• Risk/commodities: With oil prices at recent highs, the Japanese yen is likely pressured due to higher import costs impacting Japan’s trade balance.
• One macro factor: The performance of the US manufacturing sector will be pivotal, especially following January's positive momentum, influencing the dollar's strength.
Range:
Expect USD/JPY to hold within its recent 3-month range, consolidating around the 156 mark.
What could change it:
• Upside risk: A surprise increase in US manufacturing data could further boost the dollar.
• Downside risk: Any move from the Bank of Japan towards normalizing its policy might strengthen the yen against the dollar.