USD/JPY challenges key technical resistance in valiant comeback

 USD/JPY is trading at 108.43 having traded between a low of 108.32 and 108.44, basically flat in a quiet-looking Asian session, absent of any key scheduled data. The defensive yen underperformed, however, overnight. Despite the Iran/US threat, USD/JPY actually turned bid and moved up from 107.80 to 108.45 and current levels.

The market has taken the opinion that there will not be a threat of outright war from the recent verbal provocations since the termination of one of Iran's top generals in last week's US drone strike.
European nations have called for a de-escalation of the situation and while Iran said that the US can expect retaliation, war is not on their agenda, and nor is it on the USA's. For that matter, the US stocks market still managed to eke out higher closes recovering from an initial risk-off plunge. Subsequently, the US 2-year treasury yields rose from 1.51% to 1.56% the high while the 10-year yields from 1.76% to 1.80%. Of course, the US dollar is usually favoured at times of war as well. 

Meanwhile, analysts at Westpac noted that the markets are "pricing no change at the next Fed meeting on 29 January but a terminal rate of 1.26% (vs Fed’s mid-rate at 1.63% currently)."

Nonfarm payrolls to take a back seat to geopolitics

Looking ahead, we will have the Nonfarm Payrolls on the agenda at the end of the week. Analysts at ING Bank explained that "with geo-political tensions driving markets right now the reaction to this report may be more limited than would otherwise have been the case."

Nonetheless, it is likely to continue to emphasise the theme of a two speed economy where manufacturing continues to struggle and the service sector is performing relatively well. Jobs continue to be created in decent numbers, but there is little wage inflation threat despite apparently tight labour markets. Consequently, with the Federal Reserve seemingly content with its current monetary policy stance the prospect of any near-term interest rate moves appears remote,

– the analysts at ING Bank explained. 

USD/JPY levels

The USD/JPY pair recovered part of the sharp losses it suffered in the past week, as noted by Valeria Bednarik, the Chief Analyst at FXStreet, who explained, however, that the advance stalled ahead of the 38.2% retracement of such slump, which indicates that the pair still has chances of resuming its decline:

"In the 4-hour chart, the 20 SMA has lost its downward strength, with the pair settling a few pips above it, while technical indicators recovered from oversold readings, holding within negative levels with uneven strength. The pair needs to extend its recovery beyond 108.50, the immediate Fibonacci resistance to shrug off its negative stance."