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  • Bank of Japan Tankan survey showed corporate inflation expectations slipped a little in the third quarter.
  • A drop in Japanese inflation expectations means Fed- BOJ divergence to grow further in the USD-positive manner.
  • Still, the USD/JPY is struggling for a convincing break above 114.00, possibly due to technical indicators reporting overbought conditions.

A drop in the inflation expectations in Japan is bearish for the JPY, still, the USD/JPY is struggling to find acceptance above 114.00.

Currently, the pair is trading 113.95, having clocked a session high of 114.02 a few minutes before press time.

The second part of the Bank of Japan’s (BOJ) survey of manufacturing and service companies released earlier today showed that Japanese firms are expecting consumer prices to rise 0.8 percent a year from now, compared to the 0.9 percent growth forecast in the second quarter. Meanwhile, long-term inflation expectations remained unchanged at 1.1 percent.

The slight downward revision of the inflation forecasts by the Japanese firms only reinforces the view that the BOJ is unlikely to wind down its ultra-easy monetary policy any time soon. On the other hand, the Fed is expected to deliver one more rate hike in December and three more rate hikes in 2019, meaning the central bank divergence is set to grow further in a USD-positive manner.

However, the   USD/JPY hardly reacted to the Tankan inflation numbers, possibly due to 14-day relative strength index (RSI) flashing overbought conditions for the first time since mid-July. Looking ahead, the oversold JPY could pick up a bid if the equities turn risk-averse.

USD/JPY Technical Levels

Resistance: 114.37 (May 2017 high), 114.49 (July 2017 high), 114.74 (November high)

Support: 113.61 (daily low), 113.17 (200-week moving average), 113.00 (psychological level)