On Friday, February 14, traders should brace for increased volatility in USD/JPY, with Bank of Japan forward guidance expected to influence Japanese Yen demand. Recent economic data has boosted expectations of a second H1 2025 Bank of Japan rate hike.
Japan’s producer prices, out on February 13, rose 4.2% year-on-year in January, up from 3.9% in December. Economists consider producer prices a leading inflation indicator as producers pass rising costs, or cost savings, on to consumers subject to demand conditions. January’s data suggests a sharp pickup in demand, potentially fueling demand-driven inflationary pressures.
Producer prices fuel BoJ rate hike bets
Meanwhile, wage growth data has further reinforced expectations of BoJ rate hikes. Average cash earnings jumped 4.8% year-on-year in December, up from November’s 3.3% rise. Wage growth is crucial for the BoJ, which needs demand-driven inflation to support a policy move toward normalization.
Global Markets Investor commented on December’s wage growth trends:
Expect MORE rate hikes in Japan this year: Japanese wages, key indicator for the Bank of Japan’s policy decisions grew 4.8% in December, the FASTEST pace in ~3 DECADES.”
Considering the latest data, BoJ forward guidance could be crucial. Bank of Japan support for multiple rate hikes could pull the USD/JPY pair toward 150. However, calls for a delay to rate hikes amid uncertainty toward Trump policies could drive the pair above 155.
USD/JPY Trends: US Retail Sales in Focus
Shifting to the US, retail sales figures will give traders insights into the demand environment. Economists expect retail sales to rise 3.7% year-on-year in January, down from 3.9% in December.
Weaker-than-expected retail sales could signal a softer inflation outlook, potentially reviving H1 2025 Fed rate cut bets. Under this scenario, the USD/JPY pair could drop toward the 200-day Exponential Moving Average (EMA). A fall through the 200-day EMA would bring the 149.358 support level into play.
Conversely, a higher retail sales reading could support a more hawkish Fed rate stance, fueling US dollar demand. A more hawkish Fed rate path may drive the USD/JPY toward the 50-day EMA. A break above the 50-day EMA could bring the 156.884 resistance level into sight.
