The USD has been marginally weaker recently due to lower than expected
US inflation figures last week that sent Treasury yields lower and made the market
to price in higher chances of a second rate cut by the end of the year.
Yesterday, the greenback weakened across the board following a WSJ report saying that Trump would lay out the trade vision but won’t impose
tariffs yet. Tonight though, he spoke to the media and said that he intends to impose 25% tariffs on Canada and Mexico next week. Following
the news, the US Dollar erased almost all the losses from the prior day.
On the JPY side, nothing
has changed as the market still expects a 25 bps rate hike at this week’s
meeting following last week’s BoJ Ueda’s comments. The yen has been stronger
against the other major currencies though due to the risk off caused by the
tariffs comments.
USDJPY
Technical Analysis – Daily Timeframe
USDJPY Daily
On the daily chart, we can
see that USDJPY broke out of the recent consolidation and it’s now approaching
the major trendline. From a risk management perspective, the buyers will have a
better risk to reward setup around the major trendline to position for a rally into the
160.00 handle. The sellers, on the other hand, will look for a break below the
trendline to extend the drop into the 149.00 handle next.
USDJPY Technical
Analysis – 4 hour Timeframe
USDJPY 4 hour
On the 4 hour chart, we can
see that we have now a downward trendline defining the current bearish momentum
on this timeframe. The sellers will likely lean on the trendline to position
for a drop into the major trendline. The buyers, on the other hand, will want
to see the price breaking higher to start targeting the 160.00 handle.
USDJPY Technical
Analysis – 1 hour Timeframe
USDJPY 1 hour
On the 1 hour chart, there’s
not much else we can add here as the sellers will look for a rejection from the
trendline, while the buyers will look for a break above it. The red lines
define the average daily range for today.
Upcoming
Catalysts
This week is pretty empty on the data front with just a couple
of key releases scheduled for the latter part of the week. On Thursday, we get
the latest US Jobless Claims figures, while on Friday we conclude the week with the
Japanese CPI, the BoJ Rate Decision and the Flash PMIs.
The Japanese Yen gains positive traction for the second straight day amid BoJ rate hike bets.
The narrowing of the US-Japan yield differential provides an additional boost to the JPY.
The risk-on mood caps the JPY and helps USD/JPY to rebound from a multi-week low.
A modest USD uptick contributes to the pair’s bounce, though the upside seems limited.
The Japanese Yen (JPY) trims a part of strong intraday gains against its American counterpart, lifting the USD/JPY pair back above the 156.00 mark heading into the European session on Thursday. Expectations that the Federal Reserve (Fed) could cut interest rates twice this year, along with easing fears about US President-elect Donald Trump’s disruptive trade tariffs, remain supportive of the risk-on mood. This turns out to be a key factor that undermines the safe-haven JPY and assists the currency pair in finding decent support ahead of the 155.00 psychological mark.
Apart from this, the emergence of some US Dollar (USD) dip-buying, bolstered by the growing acceptance that the Fed will pause its rate-cutting cycle later this month, offers support to the USD/JPY pair. That said, any meaningful JPY depreciation seems elusive amid bets for a Bank of Japan (BoJ) rate hike next week. The expectations push the yields on Japanese Government Bonds (JGBs) to multi-year highs. In contrast, the US Treasury bond yields retreated after benign US inflation data, narrowing the US-Japan yield-differential, which could further lend support to the JPY.
Japanese Yen trims a part of strong intraday gains amid the risk-on mood
Bank of Japan Governor Kazuo Ueda reiterated that the central bank will debate whether to hike rates next week and will raise policy rate this year if economic, price conditions continue to improve.
Ueda’s remarks echoed Deputy Governor Ryozo Himino’s comments earlier this and lift bets for an interest rate hike at the end of the January 23-24 meeting, providing a strong boost to the Japanese Yen.
The yield on the benchmark 10-year Japanese government bond advanced to its highest level since 2011 amid the prospects for further monetary policy tightening by the BoJ.
In contrast, the US Treasury bond yields fell on Wednesday following the release of the US Consumer Price Index (CPI), which eased fears that inflation was accelerating.
The US Bureau of Labor Statistics (BLS) reported that the headline CPI rose 0.4% in December and the yearly rate accelerated to 2.9% from 2.7% in the previous month.
The core gauge, which excludes volatile food and energy prices, rose 3.2% on a yearly basis as compared to the 3.3% increase recorded in November and expectations.
The US Dollar dived to a one-week low following the release of the latest US consumer inflation figures and contributed to the USD/JPY pair’s decline on Wednesday.
Richmond Fed President Tom Barkin said that fresh inflation data show progress on lowering inflation to the central bank’s 2% goal, but added that rates should remain restrictive.
Against the backdrop of easing fears about US President-elect Donald Trump’s disruptive trade tariffs, softer US inflation data remains supportive of the upbeat market mood.
Traders look to the US macro data for a fresh impetus later during the North American session, though the focus will remain glued to the upcoming BoJ policy meeting.
USD/JPY recovery is likely to face stiff resistance near the 156.35-156.40 area
Any further slide is likely to find some support near the 155.00 psychological mark, below which the USD/JPY pair could slide to the 154.55-154.50 region. The latter represents the lower boundary of a four-month-old upward-sloping channel and should act as a key pivotal point. A convincing break below will be seen as a fresh trigger for bearish traders and pave the way for an extension of the recent retracement slide from a multi-month peak touched last Friday. Spot prices might then weaken further below the 154.00 mark and test the next relevant support near the 153.40-153.35 horizontal zone.
On the flip side, any attempted recovery might now confront resistance near the 156.00 mark ahead of the 156.35-156.45 region and the 156.75 area. Some follow-through buying, leading to a subsequent strength beyond the 157.00 mark, might shift the bias back in favor of bullish traders and lift the USD/JPY pair to the 155.55-155.60 intermediate hurdle en route to the 158.00 round figure. The momentum could extend further towards challenging the multi-month peak, around the 158.85-158.90 region.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Scope for US Dollar (USD) to test 158.50; a breach above this level is not ruled out, but any further advance is highly unlikely to reach 159.00. In the longer run, USD is expected to trade with an upward bias against the Japanese Yen (JPY); any advance is expected to face significant resistance at 159.00, UOB Group’s FX analysts Quek Ser Leang and Lee Sue Ann note.
Any advance is expected to face significant resistance at 159.00
24-HOUR VIEW: “When USD was trading at 158.15 yesterday, we indicated that it ‘could rise, but it does not appear to have enough momentum to reach 159.00 (there is another resistance level at 158.50).’ USD subsequently rose less than expected, reaching a high of 158.42. It then closed at 158.02, higher by 0.27%. While there has been no significant increase in upward momentum, there is scope for USD to test 158.50. A break of this level this not ruled, but any further advance is highly unlikely to reach the major resistance at 159.00. On the downside, a breach of 157.30 (minor support is at 157.70) would mean that USD is more likely to trade in a range instead of testing 158.50.”
1-3 WEEKS VIEW: “There is not much to add to our update from yesterday (07 Jan, spot at 158.15). As highlighted, ‘upward momentum is building, and we expect USD to trade with an upward bias.’ We also highlighted that, ‘any advance is expected to face significant resistance at 159.00.’ We continue to hold the same view provided that 156.80 (no change in ‘strong support level) is not breached.”
