USD/JPY erases early gains, flattens out at 114.00 handle

The USD/JPY pair erased all of its early gains and has now dropped back to 114.00 handle, having posted a session high at 114.40.

After attracting some buying interest during Asian session, in wake of dovish comments from Deputy Governor Kikuo Iwata, the pair flattened out as investors seemed reluctant to carry big bets ahead of influential central bank monetary policy meetings, ECB on Thursday and FOMC on December 13-14. 

On Thursday, ECB is expected to extend its bond-buying program. However, a possible signal towards winding down or taper its asset-purchase program is likely to trigger a fresh bout of volatility in the FX market and drive the Japanese Yen's safe-haven demand. 

On the other hand, the Fed is widely expected to raise short-term rates but investors would be keen to know the pace of Fed's tightening-cycle in 2017, which would eventually determine the next leg of directional move for the greenback and provide fresh impetus for the pair's near-term trajectory.

Moreover, the prevalent risk-on mood, as depicted by buoyant European equity market, is driving flows away from traditional safe-haven assets and limiting any immediate downslide. 

Technical outlook

Omkar Godbole, Editor and Analyst at FXStreet, notes, "The ‘golden cross’ - bullish 50-MA & 200-MA crossover - has been confirmed on the daily chart as well as on the monthly chart. However, the ‘golden cross’ is a lagging indicator and is has been observed time and again in the different markets that confirmation (of the crossover) is often followed by a bout of correction. There is a bearish price-RSI divergence on the daily chart as well, which adds credence to the possibility of a correction. The key psychological support of 110.00 could be put to test if the pair closes below 112.00 levels. On the higher side, only a daily close above 115.00 would signal continuation of the rally from November 9 low of 101.20."