The Japanese Yen (JPY) gave up some of its intraday gains against the US Dollar (USD) as the USD/JPY pair rebounded above the 156.00 mark heading into the European session on Thursday. The recovery reflects a combination of factors, including risk-on sentiment spurred by reduced concerns over US President-elect Donald Trump’s trade policies and renewed USD buying amid expectations of a Federal Reserve (Fed) policy pause. However, prospects of a potential rate hike by the Bank of Japan (BoJ) next week and narrowing US-Japan yield differentials limited the Yen’s depreciation.
Key Factors Influencing USD/JPY
Risk-On Sentiment and USD Recovery
Easing fears about trade disruptions and softer US inflation data supported market risk appetite, undermining the safe-haven JPY.
Despite the benign US CPI report, dip-buying in the USD occurred as markets anticipate the Fed could pause its rate-cutting cycle, lending support to the USD/JPY pair.
BoJ Rate Hike Expectations
BoJ Governor Kazuo Ueda reiterated that the central bank might consider raising rates if economic and price conditions improve.
The yield on Japan’s benchmark 10-year government bonds reached its highest level since 2011, reflecting market expectations for further monetary tightening.
Narrowing Yield Differential
US Treasury bond yields declined after the softer CPI data, narrowing the yield gap between US and Japanese bonds and supporting the Yen.
Technical Resistance and Support Levels
Resistance Levels:
Immediate resistance is at 156.35-156.40, followed by 156.75.
Further gains may face hurdles at 157.00, with a push towards 158.00 and the multi-month peak of 158.85-158.90 possible on sustained bullish momentum.
Support Levels:
Initial support lies at the psychological 155.00 mark.
Below this, 154.55-154.50 forms the lower boundary of a four-month upward-sloping channel.
Further downside could see a test of 154.00, with the next significant support zone near 153.40-153.35.
Market Outlook and Focus
Investors are awaiting US macroeconomic data, including Retail Sales and Initial Jobless Claims, for further clues on the economic outlook and Fed policy trajectory. Meanwhile, the upcoming BoJ meeting on January 23-24 will be a critical driver of JPY movement. Traders will also monitor developments in US-Japan yield differentials and any geopolitical risks that could influence safe-haven flows.
Short-Term Bias: Neutral-to-bearish, with risks skewed towards further JPY strength if BoJ hawkishness gains traction.
Long-Term Bias: Mixed, contingent on Fed-BoJ policy divergence and macroeconomic developments.
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