The Japanese Yen (JPY) has risen for the third consecutive day on Monday, moving away from a multi-month low touched last week. A risk-off sentiment, fueled by weaker equity markets, has supported the safe-haven Yen. However, doubts surrounding the Bank of Japan‘s (BoJ) rate hike plans are likely to limit the JPY’s upward momentum.
Japan’s increasing inflationary pressures keep expectations of another BoJ rate hike in play for January or March. Nevertheless, some investors believe the central bank may wait until April to confirm that strong wage momentum will continue through the spring negotiations. Additionally, the widening US-Japan yield differential could also weigh on the JPY, limiting its potential gains.
While the Yen benefits from global risk aversion, the broader bullish sentiment surrounding the US Dollar (USD)—boosted by expectations that the Federal Reserve will pause its rate-cutting cycle—continues to support the USD/JPY pair. In the absence of major economic data, the mixed fundamental backdrop suggests caution before positioning for further Yen appreciation.
Geopolitical Tensions and Economic Data Support JPY, But USD Dominates
A combination of geopolitical tensions and investor caution toward riskier assets has driven demand for safe-haven assets, including the Japanese Yen. Recent developments, such as tougher US and UK sanctions on Russia’s oil industry and ongoing military actions in Ukraine and Lebanon, have intensified global risk aversion. These factors, alongside Israeli strikes in Gaza, have further amplified the demand for the Yen.
On the economic front, the US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls increased by 256,000 in December, surpassing expectations. The Unemployment Rate unexpectedly dipped to 4.1%, though annual wage inflation decreased slightly to 3.9%. This strong jobs data reinforced expectations that the Federal Reserve will pause its rate-cutting cycle, which contributed to the USD reaching a two-year high and US Treasury yields climbing to their highest level in over a year.
The widening US-Japan yield differential continues to pressure the JPY, as the Fed’s stance diverges from the BoJ’s accommodative policies. With the market’s focus now shifting to the release of the US Producer Price Index (PPI) and Consumer Price Index (CPI) this week, these upcoming data points could significantly influence the USD/JPY pair.
Technical Outlook for USD/JPY: Key Levels to Watch
From a technical standpoint, support for the USD/JPY pair is seen around the 157.20-157.00 zone, with further support near 156.80-156.75. Any pullbacks toward these levels could present buying opportunities, with 156.00 acting as a key level for bulls. A decisive break below this mark could shift the bias toward bearish traders and open the door for deeper losses.
On the upside, the 158.00 level marks the immediate hurdle, with resistance further ahead at 158.45-158.50 and the 158.85-158.90 zone, near the multi-month high touched on Friday. A break above 159.00 would likely trigger further buying, pushing the USD/JPY pair toward the 160.00 psychological level.
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