Japanese Yen and Australian Dollar News: Aussie Inflation and the RBA

Did the Bank of Japan Get a December Greenlight for a Hike?

The USD/JPY pair is navigating a period of monetary policy uncertainty. On Friday, November 22, Japan’s national inflation figures fueled speculation about a December Bank of Japan rate hike. The annual inflation rate ex-food and energy increased from 2.1% in September to 2.3% in October, moving further above the BoJ’s 2% target.

The Jibun Bank Services PMI rose from 49.7 in October to 50.2 in November, boosting bets on a December BoJ rate hike. Similarly, on Tuesday, November 26, Japan’s Corporate Services Price Index (CSPI) increased by 2.9% year-on-year, up from 2.8% in September, fueling market speculation.

However, the BoJ’s inflation data sent conflicting signals. The BoJ’s core inflation rate dropped from 1.7% in September to 1.5% in October, pulling back from the 2% target. Despite this, the USD/JPY pair dropped below 153 on Tuesday as services sector data seemingly overshadowed the BoJ’s inflation data. Services sector prices, crucial to the BoJ’s interest rate decisions, took center stage.

BoJ Governor Kazuo Ueda recently remarked on the significance of services sector prices on monetary policy, stating,

“October is a month when service price revisions are concentrated in Japan, so we must scrutinize data carefully.”

Economists Signal a December BoJ Rate Hike

Another factor driving speculation about a rate hike is the Japanese Yen’s weakness. A weaker Yen increases import prices, raising the cost of living and potentially dampening household spending. Household spending is crucial for the Japanese economy as private consumption contributes over 60% to Japan’s GDP.

On Monday, November 25, CLSA Strategist Nicholas Smith predicted a 25-basis point December BoJ rate hike and two additional rate hikes in 2025. Smith suggested that rate hikes could benefit Japan’s households by strengthening the Yen. A stronger Japanese Yen may lower import costs, potentially lowering living costs.

Japanese Yen Daily Chart

In Wednesday’s US session, the USD/JPY will be in the hands of the US Personal Income and Outlays Report.

Upward trends in the Core PCE Price Index and personal income/spending could suggest a potential pickup in inflationary pressures, dampening bets on a December Fed rate cut. A less dovish Fed rate path may push the USD/JPY toward 154, a crucial resistance level.

Conversely, weaker inflation and personal income/spending data may raise expectations of a December rate cut, dragging the pair toward the 151.685 support level.

Other US economic indicators include US GDP, durable goods orders, and jobless claims. However, these will likely play second fiddle to the Personal Income and Outlays Report.

AUD/USD, Inflation, and the RBA Rate Path

Shifting focus to the AUD/USD, the Aussie inflation data garnered interest on Wednesday, November 27. The all-important Monthly CPI Indicator increased by 2.1% in October, mirroring September.

Will the inflation data fuel bets on a December RBA rate cut?

Australia’s annual inflation rate remained comfortably within the RBA’s 2-3% target range. However, a December rate cut seems unlikely until the RBA evaluates the next quarterly inflation report, scheduled after the December interest rate decision.

RBA Governor Michele Bullock recently highlighted that headline inflation could drop within the target range but may not reflect underlying inflation. Nevertheless, housing sector inflation trends from the Monthly CPI Indicator signaled a potential cooling in services inflation, necessary for an RBA rate cut.

Australian Dollar Daily Chart

In the US session, the crucial Personal Income and Outlays Report will influence the AUD/USD and the Fed rate path.

A hotter-than-expected Core PCE Price Index may lower bets on a December Fed rate cut. A less dovish Fed rate path may pull the AUD/USD below $0.64500, a crucial support level.

Conversely, softer inflation data may drive the AUD/USD toward $0.65. However, investors should also consider personal income and spending trends, which could give insights into the inflation outlook,

Vigilance Amid Volatile Markets

Traders should maintain vigilance, tracking central bank communications and economic data for actionable insights. With market sentiment driven by central bank policy expectations, the USD/JPY and AUD/USD remain subject to volatility, underscoring the importance of staying informed.