Japanese Yen weakens against US Dollar, bullish potential seems intact

• The Japanese Yen kicks off the new year on a softer note against the US Dollar.
• Bets that the BoJ will exit the negative interest rates regime should help limit further losses.
• Dovish Fed expectations cap the USD recovery and should act as a headwind for USD/JPY.

The Japanese Yen (JPY) ticks lower against its American counterpart amid relatively thin liquidity during the Asian session on Monday, albeit remains well within the striking distance of a five-month high touched last Thursday. Market players seem convinced that the Bank of Japan (BoJ) will exit its ultra-loose policy and lift interest rates into positive territory by the first half of 2024. The current pricing suggests a strong possibility of such an action in April, after the annual wage negotiations in March. The BoJ, meanwhile, has caught investors off guard in the past with changes to its policy settings and hence, a move at the January meeting cannot be ruled out completely. This, in turn, could act as a tailwind for the domestic currency.

The US Dollar (USD), on the other hand, has taken a tumble in recent weeks on the back of rising bets for a series of interest rate cuts by the Federal Reserve (Fed) in 2024. In fact, the markets anticipate the first rate cut as early as March and are pricing in 150 basis points (bps) of cumulative cuts by the end of this year. The expectations were reaffirmed by slightly higher than projected decline in the US Core Personal Consumption Expenditure (PCE) Price Index data – the Fed's preferred inflation gauge. This ensures that the US central bank may achieve a soft landing for the economy in 2024 and soften its hawkish stance, which should keep the USD bulls on the defensive and keep a lid on any meaningful appreciating move for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen to draw support from hawkish BoJ expectations

• The Japanese Yen snaps a three-day winning streak against the US Dollar on Tuesday, though the near-term bias seems tilted in favour of bullish traders.
• Bets for an imminent shift in the Bank of Japan's policy stance after the annual wage negotiations in March might continue to act as a tailwind for the JPY.
• Western Japan was hit by a 7.6 magnitude earthquake on Monday that led to a 1.2-meter tsunami, though had limited impact on the markets amid thin liquidity.
• Dovish Federal Reserve expectations keep a lid on the recent US Dollar recovery from its lowest level since late July and act as a headwind for the USD/JPY pair.
• The markets have priced in the possibility that the Fed will cut rates six times this year, starting as early as March, amid hopes for a soft landing for the economy.
• Traders now look to the key US macro data scheduled at the beginning of a new month, including the NFP report on Friday, for some meaningful impetus.
• Investors will further confront the release of FOMC meeting minutes on Wednesday, which will be scrutinized for cues about the timing of the first rate cut.
• This week's US economic docket also features the ISM Manufacturing PMI and JOLTS Job Openings on Wednesday, followed by the ADP report on Thursday.

Technical Analysis: USD/JPY bears have the upper hand, 200-day SMA holds the key

From a technical perspective, the recent breakdown and acceptance below the 200-day Simple Moving Average (SMA) was seen as a fresh trigger for the USD/JPY bears. Moreover, oscillators on the daily chart are yet to signal oversold conditions and support prospects for deeper losses. Hence, any subsequent move up might still be seen as a selling opportunity and runs the risk of fizzling out quickly ahead of the 142.00 round figure. That said, some follow-through buying could trigger a short-covering move and lift spot prices beyond the 142.40 intermediate hurdle, towards retesting the 200-day SMA breakpoint, currently near the 143.00 mark.

On the flip side, the 141.00 round figure could protect the immediate downside ahead of the multi-month low, around the 140.25 region touched last week, and the 140.00 psychological mark. The latter should act as a key pivotal point, which if broken decisively could make the USD/JPY pair vulnerable to accelerate the fall towards the 139.35 region en route to the 139.00 mark, the 138.75 area and the 138.00 mark (July 28 low).