USD/JPY Outlook: Seems vulnerable amid Fed rate cut bets and hawkish BoJ speculations

• USD/JPY meets with a fresh supply on Thursday and is pressured by renewed USD selling bias.
• Dovish Fed expectations trigger a fresh leg down in the US bond yields and undermine the buck.
• Bets of an imminent shift in the BoJ’s policy stance boosts the JPY and contributes to the decline.

The USD/JPY pair struggles to capitalize on its strong recovery move witnessed over the past two days, from the 147.15 area, or its lowest level since September 14, and comes under some renewed selling pressure on Thursday. The downward trajectory drags spot prices below the 149.00 mark during the early European session and is sponsored by broad-based US Dollar (USD) weakness.

Despite Tuesday's hawkish FOMC minutes, the current market pricing indicated a near-zero probability of any further interest rate increases and a better than 50% chance of a rate cut at the April 30-May 1, 2024 policy meeting. This is reinforced by a fresh leg down in the US Treasury bond yields, which, in turn, is seen exerting pressure on the Greenback. Dovish Fed expectations, meanwhile, overshadow the better-than-expected US labour market and consumer sentiment data released on Wednesday. The US Department of Labor reported that Initial Jobless Claims dropped by 24,000 to a seasonally adjusted 209,000 for the week ended November 18. This marked the lowest level in more than a month, suggesting that the US jobs market remains resilient and is not cooling as quickly as anticipated.

Adding to this, the University of Michigan's survey showed that Inflation expectations rose for the second straight month and reached the highest level since April 2023, coming in at 4.5% for November as compared to the 4.2% previous. The Consumer Sentiment, however, fell for a fourth consecutive month, to 61.3 during the reported month from 63.8 in October. Other data showed that US Durable Goods experienced a significant decline and dropped more than anticipated, by 5.4% in October, reversing the previous month's gain of 4.6% and pointing to slowing economic demand. This reaffirms market expectations that the US central bank had reached an interest rate peak. In contrast, the Bank of Japan (BoJ) might be getting closer to exiting the decade-long extremely accommodative monetary policy settings.

Expectations of Japanese firms delivering another substantial round of pay hikes next year could fuel consumer spending and demand-driven inflation-raised bets on the BoJ will almost certainly end its negative rate policy in the first few months of 2024. This, in turn, is seen driving flows towards the Japanese Yen (JPY) and contributing to the offered tone surrounding the USD/JPY pair. That said, the US Thanksgiving holiday is expected to lead to reduced market activity and lower trading volumes, which might hold back traders from placing aggressive directional bets. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for spot prices is to the downside. The focus, meanwhile, remains on the National core CPI from Japan, due for release during the Asian session on Friday.

Technical Outlook

From a technical perspective, the USD/JPY pair stalled this week's solid recovery move ahead of the 150.00 psychological mark. The said handle coincides with the 200-period Simple Moving Average (SMA) on the 4-hour chart and should now act as a key pivotal point. Meanwhile, oscillates on the daily chart have just started gaining negative traction and suggest that the path of least resistance for spot prices remains to the downside. Hence, any attempted recovery back towards the overnight swing high, around the 149.75 region, is likely to get sold into and remain capped near the 150.00 mark.

A sustained strength beyond the latter, however, might trigger a short-covering rally and lift the USD/JPY pair towards the 150.70-150.75 hurdle en route to the 151.00 round figure. Some follow-through buying will suggest that the recent corrective decline has run its course and allow bulls to aim back towards challenging the YTD peak, just ahead of the 152.00 mark, with some intermediate resistance near the 151.60 region.

On the flip side, the 148.55-148.50 zone could protect the immediate downside, below which the USD/JPY pair could turn vulnerable to weaken further below the 148.00 mark and retest the monthly low, around the 147.15 region touched on Tuesday. The next relevant support is pegged near the 100-day SMA, currently around the 146.65 area, which if broken decisively will be seen as a fresh trigger for bearish traders and pave the way for a further near-term depreciating move.