28.02.202500:01 Forex Analysis & Reviews: Yen Continues to Target Further Strengthening

The dollar received a significant boost on Thursday following the release of the second GDP estimate for Q4, which reported an economic growth rate of 2.3%. While this figure was expected, the price index was revised upward from 2.2% to 2.4%. Additionally, the Personal Consumption Expenditures (PCE) index, which reflects the growth of personal consumption expenditures in both core and overall terms, showed an increase. This latter development raises questions about easing inflationary pressures, but consumer demand remains robust. The PCE data for January will be released on Friday, and if it indicates a rise, it could lead to a substantial re-evaluation of Federal Reserve rate forecasts, thereby increasing demand for the dollar.

Furthermore, durable goods orders also exceeded expectations, indicating a strengthening of production capacity, which indirectly suggests resilience in consumer spending. Given the confirmed threat of renewed inflationary pressures, it is quite possible that the dollar will attempt to strengthen further against major currencies today.

The yen could face significant challenges ahead. With the release of the Tokyo region inflation index for February scheduled for Thursday night, concerns were mounting that inflation may exceed last month's figures. This could place additional pressure on the Bank of Japan to implement another rate hike. If the forecast holds true, the yen may rebound from its recent decline.

Currently, the market anticipates that the BOJ could raise rates twice this year. This pace is expected to moderately strengthen the yen without causing drastic fluctuations. However, if inflationary pressures turn out to be stronger than expected, the market might adjust its outlook, predicting three rate hikes instead of two. Such a shift could potentially lead to a significant decrease in the USD/JPY exchange rate, possibly reaching the September low of 139.59.

The bond market is already adjusting to the possibility of three rate hikes, as evidenced by the recent rise in yields on 10-year Japanese Government Bonds (JGBs) above 1.4%. This trend reflects growing concerns that the BOJ's next rate hike may occur sooner than anticipated, and that future interest rates may be higher than 1%.

The uncertainty arising from the new U.S. administration could work in favor of the Japanese currency. Trump has not made any statements regarding the yen, and any significant changes that increase uncertainty could heighten demand for defensive assets. Therefore, there is currently no reason to expect the USD/JPY exchange rate to rise.

During the reporting week, net long positions on the yen increased by 502 million, bringing the total to 4.98 billion. This indicates a slow but steady shift in favor of the yen. Meanwhile, the settlement price continues to decline.

In the previous review, we discussed the potential for a breakout at the 148.68 support level. This target was achieved; however, the yen did not strengthen further. Following Thursday's data release, the dollar has gained considerable strength, but it remains uncertain how the swaps market will respond to the Fed's rate forecast.

We anticipate that the yen may strengthen further, with another attempt to breach the 148.68 support level, potentially leading to a decline toward the 146.80/147.00 range. Although we expect a rise in the dollar after the release of Friday's PCE data, we do not anticipate a significant increase. The USD/JPY pair is likely to encounter resistance within the bearish channel at either 150.90 or slightly above 151.60/80, after which we expect it to decline.