USD/JPY Forecast: Not out of the woods yet, attempted recovery could get sold into

The USD/JPY pair witnessed heavy selling for the third successive day on Thursday and dropped to over a one-week low amid a weaker US Dollar. The minutes of the November Federal Open Market Committee (FOMC) meeting revealed that a substantial majority of policymakers judged that a slowing rate hike would soon be appropriate. Officials were largely satisfied they could stop front-loading the rate increases and move in smaller steps, though acknowledged there had been little demonstrable progress on inflation. The dovish assessment of the minutes, however, cemented expectations for a 50 bps lift-off at the next FOMC meeting in December. This led to an extension of the recent decline in the US Treasury bond yields and continued weighing on the greenback.

In fact, the yield on the benchmark 10-year US government bond dropped to its lowest level since early October. This resulted in the narrowing of the US-Japan rate differential, which, in turn, benefitted the Japanese Yen and exerted additional downward pressure on the USD/JPY pair. That said, a more dovish stance adopted by the Bank of Japan kept a lid on any further gains for the JPY. It is worth mentioning that BoJ Governor Haruhiko Kuroda reiterates last week that the central bank will stick to its monetary easing to support the economy and achieve the 2% inflation target in a stable fashion. Apart from this, the risk-on mood acted as a headwind for the safe-haven JPY and assisted spot prices to find some support near the 138.00 round-figure mark.

The aforementioned factors push the USD/JPY pair higher during the Asian session on Friday, though the uptick lacks bullish conviction amid the prevalent USD selling bias. Traders also seem reluctant to place aggressive bets in the wake of relatively thin trading volumes and absent relevant market-moving economic releases. Nevertheless, spot prices remain well within the striking distance of the monthly low touched last week and register weekly losses amid the underlying bearish sentiment surrounding the greenback.

Technical Outlook

From a technical perspective, the USD/JPY pair, so far, has been showing some resilience below the 61.8% Fibonacci retracement level of the August-October rally. This makes it prudent to wait for sustained weakness below the 138.00 mark before placing fresh bearish bets. The next relevant support is pegged near the monthly low, around the 137.65 region, below which spot prices seem more likely to accelerate the fall towards the 137.00 mark. The downward trajectory could further get extended to the 136.45 intermediate support en route to the 136.00 round figure.

On the flip side, the Asian session high, around the 139.00 mark, now seems to act as an immediate strong resistance. Any further recovery attempted might still be seen as a selling opportunity and remain capped near the 140.00 psychological mark. That said, some follow-through buying could trigger a short-covering rally and lift the USD/JPY pair towards the 141.00-141.10 confluence, comprising the 100-day SMA and the 50% Fibo. level. A strength back above the said barrier is needed to negate the near-term bearish outlook and support prospects for a further recovery back towards the 142.00 round figure.