The Japanese Yen (JPY) continued to maintain its strength for the third consecutive day, although its upward momentum lacked conviction as expectations around Bank of Japan (BoJ) rate hikes remained mixed. Inflationary pressures in Japan suggest the possibility of a rate hike in January or March, but some investors believe the BoJ might wait until April for clearer confirmation that wage growth will persist into spring negotiations. This uncertainty has tempered aggressive bullish bets on the Yen.
The recent widening of the US-Japan yield differential, driven by hawkish Federal Reserve (Fed) expectations, continues to weigh on the JPY, keeping it under pressure. Meanwhile, the US Dollar (USD) remains firm, trading near its highest level in over two years, as expectations grow that the Fed will pause its rate-cutting cycle this month. Despite this, the Yen’s safe-haven status continues to attract demand amid a weaker risk tone in global markets, as concerns over geopolitical tensions rise.
Geopolitical Tensions Boost JPY’s Safe-Haven Appeal
The Yen’s modest intraday gains on Monday were supported by a broader risk-off sentiment, with a mix of geopolitical uncertainties and rate concerns dampening investor appetite for riskier assets. The US and UK governments recently imposed tougher sanctions on Russia’s oil industry, targeting nearly 200 vessels in the so-called shadow fleet. Additionally, the Russian Defense Ministry confirmed strikes on Ukrainian military targets, and tensions escalated in the Middle East with renewed Israeli strikes in Lebanon and Gaza.
The safe-haven Yen found support in these turbulent conditions, despite the strength of the USD. The latest US Bureau of Labor Statistics (BLS) report showed a stronger-than-expected rise in Nonfarm Payrolls for December, reinforcing expectations that the Fed will pause its rate-cutting cycle later this month amid persistent inflation and political uncertainty. The upbeat US labor data drove the USD to a two-year peak, and US Treasury yields surged to their highest levels in over a year, further widening the US-Japan yield differential and capping the Yen’s upside potential.
Market Focus Shifts to US Inflation Data
As the week progresses, market attention will turn to the release of the US Producer Price Index (PPI) and the Consumer Price Index (CPI) for December, set for Tuesday and Wednesday. These inflation data points will be crucial in shaping market sentiment toward the USD/JPY pair, influencing potential movements in both the Yen and the US Dollar.
Technical Outlook: USD/JPY Faces Support at 156.80-156.75
From a technical perspective, the USD/JPY pair faces immediate support around 157.20, with further key levels at 157.00 and 156.80-156.75. A break below these zones could trigger a deeper corrective pullback, with the next potential support around the 156.25-156.20 region. On the upside, resistance lies near 158.00, followed by the 158.45-158.50 range. A push above 159.00 would provide fresh bullish momentum, paving the way for further gains towards the 160.00 psychological level.
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