- USD/JPY extends its sideways consolidative price move and remains below the mid-130.00s.
- Bets for smaller rate hikes by the Fed weigh on the USD and act as a headwind for the pair.
- The cautious market mood underpins the JPY and further contributes to capping the upside.
The USD/JPY pair struggles to gain any meaningful traction and seesaws between tepid gains/minor losses through the early part of the European session on Wednesday. Spot prices remain below the mid-130.00s as traders seem reluctant and keenly await the outcome of a two-day FOMC monetary policy meeting.
The Fed will announce its decision later during the US session and is widely expected to moderate the pace of its rate-hiking cycle amid signs of easing inflationary pressures. The bets were reaffirmed by the US wage growth data released on Tuesday, which showed that labor costs increased less than expected in the fourth quarter. This, in turn, is seen dragging the US Treasury bond yields lower and weighing on the US Dollar, which, in turn, acts as a headwind for the USD/JPY pair.
Investors, meanwhile, have turned cautious heading into the key central bank event risk. This is evident from the prevalent cautious mood around the equity markets and lends support to the safe-haven Japanese Yen (JPY). Apart from this, speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year, underpins the JPY. The fundamental backdrop favours bearish traders and suggests that the path of least resistance for the USD/JPY pair is to the downside.
Even from a technical perspective, the recent price action witnessed over the past two weeks or so constitutes the formation of a symmetrical triangle. Against the backdrop of a sharp corrective fall from over a three-decade top, the said triangle could be categorized as a bearish pennant and validates the negative outlook for the USD/JPY pair. Hence, any attempted recovery move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.
Market participants now look forward to the US economic docket, featuring the release of the ADP report on private-sector employment, ISM Manufacturing PMI and JOLTS Job Openings data. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Apart from this, traders will take cues from the broader market risk sentiment to grab short-term opportunities ahead of the highly-anticipated FOMC policy decision.
Technical levels to watch
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