The Japanese Yen (JPY) has strengthened for the third consecutive day against the US Dollar (USD), pulling the USD/JPY pair away from the multi-month high it reached on Friday. The shift in global risk sentiment, spurred by growing expectations that the US Federal Reserve (Fed) will pause its rate-cutting cycle later this month, has provided support for the JPY. Additionally, geopolitical risks have driven investors towards the safe-haven currency.
The broadening inflationary pressures in Japan, which suggest the potential for another interest rate hike by the Bank of Japan (BoJ) in January or March, have further supported the JPY. However, some investors are betting that the BoJ may delay action until April to confirm that strong wage growth will persist through spring negotiations, limiting the upside for the yen.
Despite this, the recent widening of the US-Japan yield differential, driven by hawkish expectations for the Fed, has kept downward pressure on the lower-yielding JPY. Moreover, ongoing US Dollar buying has acted as a tailwind for the USD/JPY pair, suggesting caution for those looking for a deeper corrective slide. Traders are likely to focus on this week’s release of the US inflation data for further direction.
Safe-Haven Flows and Geopolitical Tensions Drive Yen’s Gains
Geopolitical tensions, including new US and UK sanctions on Russia’s oil industry, heightened military strikes in Ukraine, and ongoing Israeli strikes in Lebanon and Gaza, have spurred a risk-off mood in the markets, further supporting safe-haven currencies like the JPY.
The US Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls rose by 256,000 in December, surpassing market expectations and driving the US Dollar to over a two-year peak. However, annual wage inflation slowed to 3.9%, leading markets to expect that the Fed will pause its rate-cutting cycle later this month, reinforcing the USD’s strength. The higher US Treasury yields, coupled with the widening US-Japan yield differential, have capped further upside for the JPY.
Technical Outlook: USD/JPY Set for Consolidation with Bias Toward Upside
From a technical perspective, the USD/JPY pair is holding above key support levels, with immediate support seen around 157.00, followed by the 156.80-156.75 zone. Any further weakness toward these levels is expected to attract dip-buying, which may limit the downside for the pair.
On the upside, the immediate resistance is near 158.00, followed by the 158.45-158.50 region. A sustained move beyond the 159.00 level could signal a fresh bullish push, bringing the pair toward the mid-159.00s and the psychological 160.00 mark. However, traders will likely await the upcoming US inflation figures to gauge whether the current bullish trend will continue.
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