USD/JPY Forecast: Seems vulnerable to retest multi-month low, around 127.20 area

• USD/JPY drops to a two-week low on Thursday amid the prevalent USD selling bias.
• Bets that the Fed will begin cutting rates later this year weigh heavily on the buck.
• Expectations for a hawkish shift by the BoJ benefit the JPY and also exert pressure.

The USD/JPY pair remains under some selling pressure for the third successive day on Thursday and drops to a two-week low during the Asian session. The downtick is sponsored by sustained US Dollar selling, led by a less hawkish FOMC. As was widely expected, the US central bank decided to raise the policy rate by 25 bps and reiterated its commitment to keep hiking interest rates to cool price pressures. The markets, however, started betting that headwinds stemming from the continuous rise in borrowing costs could lead to a sharp economic slowdown in the US and force the Fed to reverse its hawkish stance.

Furthermore, Fed Chair Jerome Powell, speaking at the post-meeting press conference, acknowledged that the disinflationary process is in its early stages. This, in turn, fuels speculations that the Fed might begin cutting rates later this year and weighs on the USD. Apart from this, mostly disappointing US macro data released on Wednesday is further undermining the buck. In fact, Automatic Data Processing (ADP) reported that the US private sector employers added 106K jobs in January, down from December's upwardly revised reading of 253K and below the 178K estimated. Separately, the US ISM Manufacturing PMI also fell short of market expectations and dropped to 47.4 in January from the 48.4 previous.

The Japanese Yen (JPY), on the other hand, draws support from fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. The bets were lifted by recent data, which showed that Nationwide core inflation in Japan reached its highest annualized print since December 1981. This further contributes to the offered tone surrounding the USD/JPY pair. The Japanese central bank, however, wants to maintain its current monetary policy settings and has shown readiness for additional purchases of JGBs to keep the yield curve within its preferred range. This, along with a modest bounce in the US Treasury bond yields, lends some support to the greenback and helps limit any further losses for the major, at least for the time being.

Nevertheless, the fundamental backdrop seems tilted firmly in favour of bearish traders and supports prospects for an extension of the ongoing depreciating move. Traders now look forward to the release of the Weekly Initial Jobless Claims from the US, due later during the early North American session. Apart from this, the ECB and the BoE policy decisions might infuse some volatility in the markets, which, in turn, should provide a fresh impetus to the USD/JPY pair. The focus will then shift to the closely-watched US monthly jobs data - popularly known as NFP on Friday.

Technical Outlook

From a technical perspective, the post-FOMC downfall confirms a breakdown through a short-term ascending trend-line support. Spot prices, however, manage to find some support around the 128.20 area, or the 61.8 Fibonacci retracement level of the January-October 2022 strong rally. Some follow-through selling below the 128.00 mark will validate the negative outlook and set the stage for further losses. The USD/JPY pair might then accelerate the all towards retesting the multi-month low, around the 127.20 region touched on January 16. This is closely followed by the 127.00 mark, below which the pair could slide to May 2022 low, around the 126.35 zone.

On the flip side, the 129.00 round figure now seems to act as an immediate hurdle ahead of the aforementioned trend-line support breakpoint, currently around the 129.35 region. A sustained move beyond the latter might trigger a short-covering rally and allow the USD/JPY pair to reclaim the 130.00 psychological mark. Any further move up, however, might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 130.40-130.60 heavy supply zone.