The USD/JPY pair surged to the mid-152.00s during the Asian session on Thursday, approaching a two-week high. This move follows a period of upward momentum, fueled by diminishing expectations for a Bank of Japan (BoJ) rate hike in December, alongside rising US Treasury yields and a positive equity market sentiment, which are collectively weighing on the Japanese Yen (JPY).
Although JPY bears are gaining ground, market participants remain cautious, opting to wait for the BoJ’s policy decision next week. The Yen’s recent decline is being tempered by the subdued price action in the US Dollar (USD), which limits the upside for USD/JPY. However, expectations that the Federal Reserve (Fed) will take a more cautious approach to rate cuts continue to support the USD and bolster the upward trend in USD/JPY observed in the past week.
BoJ Remains Cautious on Rate Hikes, Supporting Yen Weakness
Reports from Bloomberg and Reuters on Wednesday and Thursday suggest that the Bank of Japan is not in a rush to raise rates. BoJ officials are reportedly open to hiking in the future but are inclined to wait for more data and market developments. This has dragged the Yen lower, with the currency recently hitting a two-week low against the US Dollar.
Japan’s economy is growing moderately, with steady wage increases and inflation exceeding the BoJ’s 2% target. Despite this, the central bank is showing reluctance to tighten policy, particularly ahead of its next meeting. Traders are expected to hold off on placing aggressive bets on the Yen until after the BoJ’s decision next week, which coincides with the Federal Reserve’s expected interest rate cut.
US Economic Data and Fed Expectations Support USD Strength
The US Dollar is receiving support from recent US economic data, particularly the November Consumer Price Index (CPI), which showed a 0.3% month-on-month increase, bringing the annual rate to 2.7%. The core CPI, excluding food and energy, also rose 0.3%, with an annual gain of 3.3%, in line with market expectations. Despite signs of a cooling labor market, the Federal Reserve is still expected to deliver a third consecutive rate cut at its December meeting.
In addition, the US 10-year Treasury yield hit a two-week high on Thursday, supported by market expectations that the Fed may pause its rate cuts in early 2024. This is providing a tailwind for the US Dollar, particularly in the context of the USD/JPY pair.
Technical Outlook: USD/JPY Poised for Further Gains
From a technical standpoint, the breakout above the 200-day Simple Moving Average (SMA) at 152.00 has triggered fresh buying interest in USD/JPY. Oscillators remain in positive territory, with no signs of being overbought, suggesting that the path of least resistance is to the upside.
Resistance is seen near the 152.70-152.80 range, which includes the 200-period SMA on the 4-hour chart and the 50% Fibonacci retracement of the recent pullback. A break above this level could set the stage for a further rally, with the next target near the 153.00 mark and a potential move toward the 153.65 area, which aligns with the 61.8% Fibonacci retracement level.
On the downside, support is expected near 152.00 and the 151.75 level. A drop below 151.00 could open the door to further declines, potentially testing 150.50 and the key psychological level at 150.00.
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