USD/JPY: Markets potentially overcooked the phase-1 deal, there is scope to 109 the figure

  • USD/JPY struggles to maintain form above 110 the figure. 
  • Bears seeking a retracement of recent rally while phase-one deal alone is not enough to spur markets on. 
  • US economic fundamentals will be the focus and whether US businesses will throve on the phase-one deal. 

USD/JPY is trending to the downside but is making hard work of it having only managed a test in the 109.80s since topping out in the 110.20s earlier this week. At the time of writing, USD/JPY is trading at 109.88, a few pips above the low of the Asian session of 109.85. 

Bears are seeking a meaningful downside correction towards 109 the figure which could come about should markets sell the fact of the phase-one trade deal which was signed in the US session on Wednesday.

Considering uncertainties over the implementation of the agreement and second-phase negotiations, real money, such as Japanese exporters, will be locking in at these levels which could exert downside pressures, squeezing out the non-committed speculative bulls on the way down. 

Moreover, with a focus, also, on the US economy, there are bearish themes in the detail which undershoot the Federal Reserve's outlook, potentially making for a more dovish case within the Federal Open Market Committee's voting members. The rate spread between the US and Japan is conducive for a lower price in USD/JPY as well – for example, the 10-year T-note yields extended Tuesday’s decline, from 1.81% to 1.78% in the US session which is narrowing an already declining spread, (bearish for USD/JPY).

As for the latest data set, we got the US December Producer Price Index at +1.3% YoY which was in line with estimates, however, analysts at Westpac noted that "the core (ex food & energy) release at +1.1% (est. +1.3%) underscored the lack of any inflationary pressures from producer prices. Markets shrugged this off but coupled with the latest jobs data disappointment as well as Consumer prices, what optimism left out there can only play out for so long. 

Bulls now need highly positive numbers from US economy or face a bearish onslaught 

While the technical outlook remains arguably bullish with the price having completed a 50% mean reversion of the Sep 2019-Aug 2019 lows, its whether the bearish trend is more dominant than the bullish reversal – the US economy had better have something up the sleeve for the bulls at this juncture.

If we recall, the trade agreement was first announced mid-December, which has given plenty of time for the optimism to take effect for US businesses. We now need to see that play out in hard data, otherwise, markets will get spooked and the scepticism will soon take over. 

USD/JPY levels

On the chart, we have a troublesome shooting-star on the daily sticks in a key confluence area, an area mentioned in the following comprehensive technical analysis:

With persistent failures at 110.20, should the downside then play out, the immediate focus will be on the Jan 13/10 lows of Y109.45/44 ahead of the Jan 9 low of Y109.01 and daily cloud support. 

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