Forex Today: BoJ’s Asada Urges Caution on Rate Hikes; USD/JPY Nears 160

Bank of Japan policymaker Toichiro Asada has pushed back against an early interest-rate hike this morning, warning that tightening too quickly could weaken growth and underlying inflation. Asada, who opposed the Bank’s June and September increases, said consumption lacked momentum and the effects of previous hikes would emerge with a lag. His comments highlight a division within the BoJ rather than a change in its agreed policy: many analysts still expect a December increase from 1.25% to 1.50%, but this has made the general fundamental perception of the Yen weaker.

Japanese inflation data released this morning strengthen the opposing case for further tightening. Annual wholesale inflation accelerated to 7.1% in October, above the 6.5% forecast and September’s 6.8%. Yen-denominated import prices rose by 24.8% annually, illustrating how currency weakness is adding to domestic price pressures. The BoJ therefore faces a difficult balance between protecting growth and preventing imported inflation from becoming more persistent. Its next policy decision is scheduled for 18 December.

USD/JPY is approaching the important 160.00 round number, putting the risk of intervention back in focus. The pair reached approximately 159.94 in early trading, its highest level in more than two months. Japan’s top currency diplomat, Atsushi Mimura, renewed his warning against excessive exchange-rate volatility and referred to this summer’s intervention. Such warnings do not guarantee immediate action, but they increase the headline risk for traders holding long positions near 160.00. It may still be possible to look for a long trade from bullish bounces following retracements to support levels at 159.50 or 159.00.

The US Dollar has extended its recovery to a 19-month high against its major peers and is now very clearly the strongest currency fundamentally and technically. The EUR/USD currency pair is trading below 1.1100. Expectations of further Federal Reserve tightening continue to support the greenback following Tuesday’s stronger-than-expected inflation figures. The contrast between increasingly hawkish US rate expectations and Asada’s cautious message helps explain why the Yen remains under pressure despite Japan’s own high inflation readings.

The debate over December’s Fed decision remains focused on the size of a hike rather than whether one will occur. Tuesday’s monthly CPI increases of 0.4% headline and 0.3% core exceeded forecasts, encouraging traders to consider a larger increase. Markets are fully pricing a December hike and another increase by March. However, a 0.50% December move remains a possibility (at 9% according to the CME FedWatch tool) rather than an announced policy decision.

Stock markets are again showing signs of vulnerability, with technology shares under renewed pressure. US equity futures have weakened during Asian trading, with Nasdaq futures underperforming S&P 500 Index futures. This leaves the recent recovery looking less secure: optimism about AI-related demand is competing with company-specific concerns and the prospect of higher interest rates. A sustained return to broad technology leadership has not yet been established. It is worth noting that the S&P 500 is in a symmetrical descending price channel which has formed since early August, which suggests that lower stock prices are likely until bulls break the upper trend line, which is currently sitting at about 7675.

Gold has slipped below the important $4,000 round number, weakening its recent bullish recovery. The stronger Dollar and expectations of higher US interest rates weigh on demand for Gold. The earlier breakout from the descending price channel has clearlyfailed to produce sustained follow-through. Bulls now need to regain and hold above $4,000 before the previously identified $4,200 resistance area becomes the immediate focus again.

Bitcoin looks set to test its 2-month low below $73,000 which was set two days ago, as it displays short-term bearish momentum within a bearish trend.

WTI Crude Oil is still trading below the former key support level at $87.68 which may now be acting as resistance. However price movements are likely to be driven mostly by the prospects of some kind of peace deal between the USA and Iran, although I believe a quiet US abandonment of the war is a more likely scenario.