Japanese Yen and Australian Dollar News: Japan Inflation Fuels BoJ Rate Hike Bets

Inflation Holds Above BoJ Target Range, Supporting Rate Hike Bets

On Friday, November 22, Japan’s national inflation figures influenced USD/JPY trends and sentiment toward the Bank of Japan rate path.

Japan’s core inflation rate eased from 2.4% in September to 2.3% in October, while the annual inflation rate dropped from 2.5% to 2.3%. While inflation eased slightly, it remained above the BoJ’s 2% target, supporting rate hike expectations.

Services PMI: A Decisive Factor for BoJ Policy in December

Preliminary private sector PMI numbers, due later in the morning session, also require consideration. Accounting for over 70% of GDP, the Jibun Bank Services PMI could be critical to the BoJ’s December interest rate decision.

Economists expect the Jibun Bank Services PMI to increase from 49.7 in October to 50.1 in November. Higher-than-expected PMI figures could boost bets on a December Bank of Japan rate hike. However, investors should also consider the price subcomponent, potentially pivotal to the December interest rate decision.

Higher prices and headline PMI could raise bets on a December BoJ rate hike, dragging the USD/JPY toward 153.5. Conversely, weaker PMI readings and softer price pressures could lower expectations of a December rate hike, potentially driving the pair toward 156.

Bank of Japan Forward Guidance on Monetary Policy

BoJ Governor Kazuo Ueda recently emphasized the significance of the services sector vis-à-vis interest rate decisions, stating,

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

Since making the comments, Governor Ueda has continued supporting a rate hike. In November, Governor Ueda stated that Japan’s economy is progressing toward sustainable inflation, supported by wage growth. A contraction across the services sector and softer services sector prices could challenge his view.

Japanese Yen Daily Chart

In today’s US session, the S&P Global Services PMI and Michigan Consumer Sentiment Index will impact US dollar demand.

Improving services sector activity and consumer confidence could sink bets on a December Fed rate hike. The services sector accounts for around 80% of US GDP and contributes to inflation. A less dovish Fed rate path may push the USD/JPY toward 156. Conversely, an unexpected slide in the Services PMI could refuel bets on a December rate cut, pulling the pair down to 153.5.

AUD/USD and Australian Services PMI: Signs of Weakness

Turning toward the AUD/USD, private sector PMI numbers signaled a weakening economy. The all-important Judo Bank Services PMI unexpectedly dropped from 51.0 in October to a 10-month low of 49.6 in November.

Accounting for over 60% of GDP, the services PMI fell below 50, indicating a sector contraction. Furthermore, the job creation rate and price weakened, raising expectations for a near-term RBA rate cut. Housing services prices, a key inflation driver, remain in focus for the RBA’s monetary policy outlook.

Expert Views on the Services PMI and RBA Rate Path

S&P Global Market Intelligence Economics Associate Director Jingyi Pan remarked on the PMI survey, stating,

“The slowing employment growth trend and softer output prices are supportive of the outlook for lower interest rates in 2024, the latter having been key in supporting business optimism in the latest survey period.”

Australian Dollar Daily Chart

Shifting the focus to the US session, service sector data and consumer confidence figures will influence AUD/USD trends.

Better-than-expected US economic data could boost US dollar demand, pulling the AUD/USD toward $0.64500. Conversely, an unexpected contraction in the Services PMI may raise expectations for a December rate cut, supporting a move toward $0.65500.

Traders should closely monitor central bank communications and economic data for real-time insights. Both USD/JPY and AUD/USD remain highly sensitive to shifts in policy expectations, emphasizing the need for vigilance in a volatile market landscape.