USD/JPY Fundamental Daily Forecast – Japan’s Government Picks Odea as Next BOJ Chief Ahead of US CPI Data

The Dollar/Yen is lower early Tuesday as investors consolidated positions ahead of today’s crucial U.S. consumer price index (CPI) data.

The Forex pair is also being pressured after Japan’s government named academic Kazuo Udea as its pick to become next central bank governor, a surprise choice that could heighten the chance of an end to its unpopular yield control policy.

Yesterday, the greenback soared to a six-week high against the rate-sensitive Japanese Yen on expectations the Federal Reserve will keep monetary policy tight for longer. This view will be challenged or confirmed by the CPI data, which loomed over Monday’s trading.

At 05:32 GMT, the USD/JPY is trading 131.897, down 0.518 or -0.39%. On Monday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $70.44, down $0.46 or -0.65%.

All Eyes on US Consumer Price Index Report

Investors expect headline CPI to rise 0.5% in January on Tuesday, after falling 0.1% in December, with the core number seen advancing to 0.4% from 0.3% the previous month, according to a Reuters poll.

Excluding food and energy, so-called core CPI is projected to rise 0.3% and 5.5%, respectively.

The CPI was trending lower as 2022 came to close. But it looks like 2023 will show that inflation was strong – perhaps even stronger than Wall Street expectations, according to CNBC.

Consumer inflation peaked out around 9% in June 2022 on an annual basis but has been on the decline since, falling to 6.4% in December. But food prices have been stubborn, still up more than 10% from a year ago in December. Gasoline prices also have reversed course, with prices at the pump up about 30 cents a gallon in January, according to AAA.

Even the initially reported 0.1% decline in the headline CPI for December has been revised up, and is now showing a gain of 0.1%, according to revisions released Friday.

Japan Names Academic Ueda as Next Central Bank Governor

The Japanese government on Tuesday nominated Kazuo Ueda to become the next governor of the Bank of Japan, the first leadership change in a decade after Gov. Haruhiko Kuroda’s aggressive monetary easing.

Japan’s Economy Grew 0.6% in Fourth Quarter, Lower than Expected

Japan’s economy expanded by 0.6% on an annualized basis for the fourth quarter of 2022, lower than expectations to see a growth of 2% in a Reuters poll.

The figure was a rebound from a revised contraction of 1% seen in the third quarter of 2022 compared to a year ago.

Private consumption rose 2% in the fourth quarter on an annualized basis, while government demand climbed 1.3% in the same period.

Short-Term Outlook – CPI Likely to Fuel Volatile Reaction

Ahead of the CPI report, U.S. money markets are positioned for U.S. interest rates to peak at 5.2% around July, compared with the Fed’s current target rate of 4.5-4.75%, but have mostly walked back expectations of major rate cuts later in the year.

If the CPI reading is hotter than expected, then this will mean the Fed’s eight interest rate increases are not having the desired effort. This will also support the case for at least two 25-basis point rate hikes. This could drive the USD/JPY sharply higher.