• The US dollar reversed after an initial rally as softer CPI data fueled rate-cut speculation, keeping USD/JPY volatile.
• Despite near-term noise and Bank of Japan risk, pullbacks are viewed as buying opportunities amid a persistent rate differential.
   

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The US dollar initially rallied during the trading session on Thursday, but gave back gains rather quickly, mainly due to the CPI numbers coming out with a lower-than-anticipated number in the United States. Therefore, people are starting to focus on the idea of whether or not the Federal Reserve may have to cut rates more quickly.

With that being the case, the market remains very noisy, and it does make a certain amount of sense that we continue to see a lot of volatility, but that’s nothing new for this pair. Furthermore, you also have to keep in mind that on Friday, we get the interest rate decision coming out of the Bank of Japan, so this is a pair that could get turned around right away.
 

Key Levels, Policy Risk, and Trade Bias

With that being the case, this is watched very closely, and pullbacks are being viewed at this point in time as buying opportunities. The 50-day EMA is near the 4.12 level and rising, and it should offer a little bit of support. The ¥158 level above is where a potential target is being watched.

Whether or not the market gets there between now and the end of the year is a completely different question, but it is expected eventually. The interest rate differential will continue to favor the Americans for the foreseeable future, and inflation and growth in the United States are expected to remain above the optimal level for the central bank. Therefore, the Federal Reserve will likely have to be a little cautious with its rate-cutting cycle.

This does not appear to be a major inflection point, at least not yet. As a result, there is no real reason to believe that the Japanese yen is going to appreciate significantly. There may be the potential for a pullback in this pair after the Bank of Japan statement or press conference, but that should be looked at as a potential opportunity.

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