AUD/USD, NZD/USD, and USD/JPY Analysis: Trade Policy and Inflation Impact

Australian Dollar Rebounds Amid Trade Policy Shifts

The Australian dollar (AUD) has recovered against the US dollar index (DXY) and shows bullish price action. The rebound in AUD/USD follows a weakening of the US Dollar from the strong resistance at 110, dropping to a five-week low of 107.20. President Trump’s imposing a 25% tariff on Colombia for refusing to accept military flights carrying deportees initially strengthened the US Dollar. These developments triggered concerns about a potential trade war and boosted safe-haven demand. However, the US Dollar weakened after Colombia agreed to Trump’s terms, putting the proposed tariffs on hold.

Australia will release its Q4 inflation data on Wednesday. The Consumer Price Index (CPI) is expected to grow by 2.5% yearly, slower than the 2.8% increase in Q3 2024. Softer inflation numbers could strengthen expectations that the Reserve Bank of Australia (RBA) will loosen its monetary policy in February. Currently, the market has priced in an 84% probability of a 25-basis-point rate cut on February 18.

The chart below shows Australia’s inflation and interest rates. Inflation has declined since 2023, while the interest rate has remained steady. This drop in inflation is the reason for an 84% probability of a 25-basis-point rate cut in February. The upcoming CPI data on Wednesday will be crucial for the RBA to assess its monetary policy decision.

Conversely, stronger-than-expected CPI figures may reinforce the RBA’s hawkish stance. The AUD remains under pressure as traders await clarity from the inflation data and the Federal Reserve’s monetary policy decision, which is expected to leave US rates unchanged at 4.25%-4.50%. These factors are likely to determine the AUD’s near-term direction.

Japanese Yen Gains as BoJ Tightens Policy Amid Inflation

The Japanese Yen (JPY) initially came under pressure after the White House announced Colombia’s agreement to accept deported migrants, easing trade tensions and reducing safe-haven demand. However, the USD/JPY followed a decline driven by USD weakness and strong support for the JPY. This decline has hit the support of $153.60, where a strong rebound has developed.

The Bank of Japan’s (BoJ) hawkish stance and narrowing US-Japan yield differentials have further bolstered the JPY. The BoJ recently implemented a 25-basis-point rate hike, the largest since 2007, signaling a shift in its monetary policy to address inflationary pressures. This move highlights the BoJ’s commitment to tightening policy as inflation and wage growth gain momentum.

This rate hike signals potential further adjustments based on inflation and wage growth. Meanwhile, Japan’s inflation rate climbed to 3.6%, its highest level since reaching 3.5% in April 2023, as shown in the chart below. Additionally, ongoing wage negotiations aim to sustain the inflationary momentum.

On the other hand, the ongoing uncertainty surrounding President Trump’s trade policies fuels demand for safe-haven assets. Additionally, Federal Reserve rate cut expectations for 2025 continue to limit US Dollar gains, with markets anticipating two cuts this year. Lower US Treasury yields and BoJ rate hikes further narrow the US-Japan yield gap, strengthening the JPY.

The market is awaiting key US data, including durable goods orders, advance GDP, unemployment claims, housing data, and the core PCE price index. These data will be crucial in driving momentum in the US Dollar Index and influencing the USD/JPY pair. The Federal Reserve’s interest rate decision on Wednesday will be pivotal in determining the next move in the USD/JPY pair.

AUD/USD Analysis – Symmetrical Broadening Wedge

The 4-hour chart for AUD/USD shows that the pair has reversed from a strong support zone and has subsequently reached resistance at $0.6340. Furthermore, the pair is consolidating its gains around this level. Notably, this strength has broken the descending channel, and the pair is now trading within a symmetrical broadening wedge pattern. Consequently, a breakout above $0.6340 will likely break the symmetrical broadening wedge and signal a strong rally.

NZD/USD Analysis – Inverted Head and Shoulders

The 4-hour chart for NZD/USD shows a similar pattern to AUD/USD, indicating bullish price action. The rebound from the support region has formed an inverted head-and-shoulders pattern. A breakout above $0.5720 will likely trigger a strong rally in NZD/USD.

USD/JPY Analysis – Descending Channel

The 4-hour chart for USD/JPY shows that the pair has formed a descending channel within a symmetrical broadening wedge pattern. Moreover, the pair has rebounded from the channel’s support level at $153.60 and has re-entered the symmetrical triangle. Consequently, this rebound indicates bullish momentum, and a breakout above $156.30 will likely trigger a strong rally in the pair.