16.02.202611:50 Forex Analysis & Reviews: USD/JPY: Correction or trend reversal?

The released figures pushed USD/JPY back into the 153 area. That said, despite the impulsive price rise, long positions in the pair still look risky, because this appears to be a corrective retracement rather than a trend change. First, the dollar remains relatively weak amid slowing US CPI, and second, the report released today is not as strong as it looks at first glance.

According to the published data, Japan's GDP grew 0.1% quarter-on-quarter in the fourth quarter of last year. On the one hand, that reading was a downside surprise, as most analysts had expected a stronger 0.4% rise. On the other hand, the economy returned to growth after a 0.7% contraction in the prior quarter. On a yearly basis, GDP was up 0.2%, after a 2.6% decline in the third quarter.

The structure of the report shows that household consumption, which accounts for more than half of the Japanese economy (up to 60%), rose 0.1% in the fourth quarter. Again, despite the slowdown from the 0.4% rise recorded in the third quarter, the important point is the positive sign itself, because higher household spending helps sustain domestic demand and reduces dependence on the external sector.

Other components of the release also showed weak but positive growth. For example, government consumption increased by 0.1% (the same rate as in the third quarter), and business capital expenditure rose 0.2% after a 0.3% decline in the prior quarter.

The GDP deflator rose 3.4% year-on-year—the same rate as in the third quarter—while most analysts had forecast a fall to 3.2%. That indicates prices are not accelerating but remain persistently elevated.

External trade figures, however, were genuinely disappointing—with no mitigating caveats. Negative dynamics in trade were recorded for a second consecutive quarter: imports fell 0.3% (after a 0.1% decline in the prior quarter), and exports fell 0.3% (after a 1.4% drop).

Nevertheless, despite weak dynamics in key indicators, Japan technically avoided a recession following the prior quarter's contraction. The "red" tone of the headline indicators weighed on the yen, but it would be premature to declare a trend reversal in USD/JPY at this stage.

The main "anchor" for the pair remains the divergence in expectations between Bank of Japan policy and the Fed. Many market participants still expect the Japanese regulator to raise interest rates in April, once the results of shunto wage negotiations (the annual talks between unions and employers) are known.

Meanwhile, CME FedWatch data show traders are pricing a 70% probability that the Federal Reserve will cut rates in early summer, at the June meeting, which would be the first under Kevin Warsh, and many market participants expect the June cut will not be the only cut this year.

Recall that Friday's CPI prints reflected slowing inflation in the United States: headline consumer prices fell to 2.4% (the lowest reading since April last year), down from two months at 2.7%. Core CPI, excluding food and energy, eased to 2.5%, the lowest since March 2021.

In other words, in January, CPI moved closer to the Fed's 2.0% target, not away to 3.0%. The Fed may interpret that as evidence that inflation remains manageable, especially if the core PCE price index to be published on Friday and also shows a downward move versus the current 2.8% forecast.

Thus, the current fundamental backdrop does not support a sustainable USD/JPY rally. Short positions should be considered only if the pair falls back below 153.10. In that case, the pair would again trade between the middle and lower lines of the Bollinger Bands on the four-hour chart and beneath all lines of the Ichimoku indicator, which would form a bearish "Parade of Lines" signal. The support level (target for a southward move) is 152.50, the lower Bollinger Band on the H4 timeframe.