The Japanese Yen (JPY) remains on the defensive against the US Dollar (USD) through the Asian session on Wednesday, as market sentiment is clouded by expectations that the Bank of Japan (BoJ) will maintain its accommodative policy stance at the conclusion of its December meeting. This, coupled with elevated US Treasury yields, continues to support the bearish outlook for the JPY, as traders anticipate the Federal Reserve (Fed) will proceed cautiously with rate cuts.
Market Awaiting Key Central Bank Decisions
Despite the JPY’s weakness, investors are taking a more cautious stance, opting to stay on the sidelines ahead of the upcoming central bank events. The Federal Reserve will announce its policy decision later on Wednesday, followed by the BoJ’s policy update on Thursday. The Fed is widely expected to lower rates by 25 basis points, with market participants closely watching the Fed’s updated economic projections and Chairman Jerome Powell’s press conference for clues about the future pace of rate cuts.
On the other hand, the BoJ is expected to remain on hold, with no immediate rate hikes anticipated, further dampening sentiment for the JPY. However, persistent geopolitical risks and a generally softer risk tone could provide support for the Yen, a traditional safe-haven currency, limiting any further gains for the USD/JPY pair.
Japan’s Trade Deficit Improves, But Weak Import Data Weighs on JPY
A report from Japan’s Ministry of Finance released on Wednesday showed an unexpected improvement in the country’s trade deficit for November, which narrowed to ¥117.6 billion from ¥462.1 billion in October. This was primarily driven by a 3.8% year-on-year increase in exports, supported by a weaker JPY and rising demand from Japan’s key trading partners, the US and China.
However, the positive export data was offset by a 3.8% decline in imports, which, along with the prevailing expectation that the BoJ will keep rates unchanged, is prompting fresh selling pressure on the JPY.
US Economic Data and Rising Treasury Yields Support USD
The US Dollar remains buoyed by rising Treasury bond yields, which were further supported by the release of stronger-than-expected US Retail Sales data for November. The Commerce Department reported that retail sales increased by 0.7% month-on-month, surpassing the 0.5% growth seen in October. While core retail sales (excluding autos) missed expectations, rising yields on US government bonds indicate growing confidence in the strength of the US economy.
With the Fed expected to cut rates by 25 basis points later in the session, investors are also pricing in a potential pause in the rate-cut cycle in the early part of 2024, due to signs that inflation is moving closer to the central bank’s 2% target. As a result, the USD remains well-supported ahead of the Fed’s decision, as traders await any signals from the central bank about its future policy path.
USD/JPY Technical Outlook: Bullish Bias Prevails
From a technical perspective, the USD/JPY pair continues to show signs of upward momentum, following a recent breakout above the key 200-day Simple Moving Average (SMA). The pair has found support from dip-buying, with oscillators on the daily chart gaining positive traction and remaining far from overbought levels, suggesting that the path of least resistance remains to the upside.
Immediate resistance is seen near the 154.00 mark, followed by the 154.45-154.50 region, which corresponds to a three-week high reached on Monday. A sustained break above this level could open the door for a move towards the psychological 155.00 mark, with further upside potential towards the mid-155.00s, targeting the 156.00 handle and the 156.25 resistance zone.
On the downside, the 153.15 area, or the recent swing low, is likely to offer support. A break below 153.00 could shift the bias to the downside, with the next support levels at the 200-day SMA near 152.15. A failure to defend this level could trigger further selling, potentially driving USD/JPY towards the 151.00 mark, followed by the 150.00 psychological support level.
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