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Yen weakness was attributed to reports the BoJ sees a high possibility of inflation falling short of its target. While inflation was propped higher in past months by the effect of the sales tax hike, it is becoming clearer that Japan is running well below target on this front. In fact, inflation after stripping out the effect of the sales tax hike drops from 1.5% to 1.1%. This has left the door open to speculation that the reading might actually slip below 1%. These fears have been stoked by the recent drop in oil prices which has resulted in prices cooling.
While this is not such a bad thing from a productivity standpoint, it really does put the BoJ’s goals into doubt. In turn, speculation has been rife that this could finally trigger another round of stimulus being deployed by the BoJ. USD/JPY reversed sharply after its recent slump and managed to squeeze back above the ¥108.00 level to trade at its highest level in two weeks. Traders are likely to use the momentum as an opportunity to push the pair higher in anticipation of an announcement confirming or denying the rumours.
USD/JPY is currently encountering some resistance at ¥108.22, which is the 61.8% retracement of the drop over the past three weeks. This will be the key level to watch in the near term, particularly heading into next week’s much anticipated FOMC meeting.