- USD/JPY languishes near the weekly low and is pressured by a combination of factors.
- Bets for smaller Fed rate hikes, softer US bond yields continue to weigh on the USD.
- Recession fears benefit the safe-haven JPY and further act as a headwind for the pair.
- Traders now look to the US Q4 GDP for a fresh impetus ahead of the FOMC next week.
The USD/JPY pair edges lower for the third successive day and touches a fresh weekly low, around the 129.00 mark during the Asian session on Thursday. A combination of factors lends some support to the Japanese Yen (JPY) and acts as a headwind for the major amid subdued US Dollar price action. The prevalent cautious mood - amid fears of a deeper global economic downturn - underpins demand for the safe-haven JPY. Apart from this, fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year continues to lend support to the JPY. The bets were lifted by data released last week, which showed that Nationwide core inflation in Japan reached 4% in December - the highest annualized print since December 1981.
The USD, on the other hand, continues with its struggle to gain traction and languishes near an eight-month low amid firming expectations for a less aggressive policy tightening by the Fed. In fact, the markets seem convinced that the US central bank will soften its hawkish stance and have been pricing in a smaller 25 bps rate hike in February. This, in turn, keeps a lid on the recent move up in the US Treasury bond yields and continues to weigh on the buck. The downside for the USD/JPY pair, however, remains cushioned as traders prefer to move to the sidelines ahead of the Advance US Q4 GDP print, due for release later today. This, along with the US Core PCE Price Index on Friday, will influence the Fed's rate-hike path and provide a fresh directional impetus to the major.
The USD/JPY pair, meanwhile, reacts little to the BoJ's Summary of Opinions published this Thursday, which showed that the central bank wants to maintain its current monetary policy settings. The BoJ also mentioned additional purchases of JGBs as one of many possible actions it can take to keep the yield curve within its preferred range. This, however, fails to impress bullish traders or provide any meaningful impetus, making it prudent to wait for a sustained move in either direction before placing aggressive bets. Nevertheless, the fundamental backdrop, along with the recent price action, suggests that the path of least resistance for the major is to the downside. Hence, attempted recovery moves might still be seen as a selling opportunity and fizzle out rather quickly.
From a technical perspective, the USD/JPY pair has been oscillating between two converging trend lines over the past two weeks or so, forming a symmetrical triangle on short-term charts. Given the recent sharp decline from over a three-decade high, this constitutes the formation of a bearish pennant and adds credence to the negative outlook for the USD/JPY pair. A convincing break below the triangle support, currently around the 128.60-128.50 region, will confirm a fresh breakdown. Spot prices might then turn vulnerable to weaken further below the 128.00 mark and challenge the multi-month low, around the 127.20 zone touched last week.
On the flip side, any strength beyond the 130.00 psychological mark might continue to confront stiff resistance near the top end of the aforementioned triangle. The said barrier is currently pegged near the 130.40-130.50 region, which should now act as a pivotal point. A sustained strength beyond could trigger a short-covering rally and lift the USD/JPY pair towards the 131.00 mark, en route to the post-BoJ swing high, around the 131.55-131.60 area. Some follow-through buying will negate the bearish bias and pave the way for a further near-term appreciating move.
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