Dollar steady ahead of European trading, eyes on the yen

It’s a key moment for the yen as it threatens to break down further in trading this week. The post-BOJ fallout hasn’t been kind to the Japanese currency, with USD/JPY threatening its highest levels in more than three decades. The pair has eased back slightly to 151.67 now but the chart tells the story better:

Buyers are keeping poised but key resistance from the 2022 and 2023 highs are still holding, at least for now. That is helped by more verbal intervention from Japanese officials earlier in the day. But are we really near a point where Tokyo would intervene to put a stop to the yen’s weakness? That is tough to say.

As the BOJ looks to normalise policy further, they need all the help they can get to keep inflation just above the 2% target. And the trend as of late hasn’t been that encouraging, as seen here.

For now, core prices are still holding thereabouts but what if they come down further in the months ahead? How is the BOJ going to use that to justify further policy normalisation? It’s certainly a tricky equation, all things considered.

Adding to that is that a weaker currency at least invites more imported inflation into the country. As convoluted as it sounds, it might be a good thing for Japan at this moment. But considering the reception to the BOJ’s pivot last week, officials have to be careful not to oversell that point.

Because as it is now, the latest tumble by the yen looks to be threatening something bigger. That especially since there is still an off chance that the Fed might not ease as much this year if inflation pressures remain stickier than anticipated down the road.

This article was written by Justin Low at www.forexlive.com.