USD/JPY Outlook: Not out of the woods yet despite dovish BoJ comments, US CPI in focus

The USD/JPY pair gains strong positive traction on Tuesday and for now, seems to have snapped a five-day losing streak to its lowest level since early February, around the 146.50-146.45 region retested the previous day. The Japanese Yen (JPY) started weakening after Japan's Finance Minister Shunichi Suzuki noted that the country was not at a stage where it could declare deflation as beaten despite some positive developments. The comments suggested that Suzuki is of the opinion that now is not the time for the Bank of Japan (BoJ) to tighten monetary policy. Adding to this, BoJ Governor Kazuo Ueda toned down optimism on the economy and said that consumption was weakening for daily necessities amid higher prices. Furthermore, Ueda fell short of offering any hints about exiting negative rates or scrapping the Yield Curve Control (YCC) policy, which, along with a generally positive risk tone, is seen weighing heavily on the safe-haven JPY.

Investors, meanwhile, seem convinced that another substantial pay hike in Japan will fuel consumer spending and demand-driven inflation, which should allow the BoJ to pivot away from its ultra-loose policy setting in the coming month. This, along with subdued US Dollar (USD) price action, amid rising bets for an imminent shift in the Federal Reserve's (Fed) policy stance, contributes to capping the upside for the USD/JPY pair. Traders also seem reluctant and prefer to wait for the release of the US consumer inflation figures for cues about the Fed's rate cut path. This will play a key role in driving the USD demand in the near term and provide some meaningful impetus to the currency pair ahead of the upcoming BoJ monetary policy meeting on March 18-19. Nevertheless, the mixed fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out and positioning for further gains.

Technical Outlook

From a technical perspective, the recent sharp pullback from the vicinity of the 152.00 mark, or the YTD peak set in February, stalled ahead of the very important 200-day Simple Moving Average (SMA). Moreover, the USD/JPY pair has been showing some resilience below the 38.2% Fibonacci retracement level of the December-February rally. The subsequent move up, however, struggles to break through the 100-day SMA support breakpoint, now turned resistance, currently around the 147.60-147.65 region, which should now act as a key pivotal point. A sustained strength beyond could trigger a short-covering rally and lift spot prices beyond the 148.00 round figure, towards the next relevant hurdle near the 148.35 area en route to the 148.65-148.70 supply zone. Some follow-through buying might then shift the near-term bias back in favour of bullish traders and pave the way for some meaningful appreciating move.

On the flip side, the 147.00 mark now seems to protect the immediate downside ahead of the 38.2% Fibo. level, around the 146.85 region and the 146.50-146.45 area, or over a two-month low touched last week. This is closely followed by the very important 200-day SMA, currently pegged near the 146.30 zone, which if broken decisively will be seen as a fresh trigger for bearish traders. Given that oscillators on the daily chart are holding deep in the negative territory, the USD/JPY pair might then slide to levels below the 146.00 mark, towards testing the 50% Fibo. level, around the 145.60 region.