- USD/JPY edges down on Wednesday and an earlier modest intraday uptick lacked bullish conviction.
- Bets for smaller Fed rate hikes continue to weigh on the USD and act as a headwind for the pair.
- Hawkish BoJ expectations, recession fears benefit the safe-haven JPY and contribute to a bearish ambiance.
The USD/JPY pair falters at the 130.00 psychological mark on Wednesday and reverses earlier gains. Spot prices remain squeezed against the upper trend line of a falling multi-month channel as the European session evolves. Without a concerted breakout from this channel higher, the default expectation remains for bulls to eventually capitulate and the broader medium-term downtrend to continue lower. Without a clear bearish signal or catalyst, however, there is still an outside risk of an upside breakout emerging.
The US Dollar remains on the defensive near a nine-month low, which, in turn, is seen as a key factor acting as a headwind for the USD/JPY pair. The markets now seem convinced that the Fed will soften its hawkish stance amid signs of easing inflationary pressures and have been pricing in a smaller 25 bps rate hike in February. This keeps a lid on the recent recovery in the US Treasury bond yields and continues to weigh on the Greenback.
The Japanese Yen (JPY), on the other hand, draws support from fresh speculation that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. The bets were lifted after the latest CPI report from Japan showed that consumer inflation rose to a 41-year high level of 4% in December. Apart from this, worries about a deeper global economic downturn benefit the safe-haven JPY and contribute to a continued bearish bias regarding the USD/JPY pair.
The aforementioned fundamental backdrop favors bearish traders and, along the with technical factors mentioned above, suggests that the path of least resistance for the USD/JPY pair is to the downside. The downside, however, seems cushioned as traders might prefer to move to the sidelines ahead of this week's important US macro releases, including the Advance Q4 GDP print and the Core PCE Price Index. For the Japanese Yen, the next key macroeconomic event is the BoJ's Summary of Opinions at 23:50 GMT later today, which will include forecasts for inflation and growth, and could spur demand for the Yen if those forecasts remain elevated. After that, the main focus moves to the highly-anticipated FOMC monetary policy meeting, scheduled for next week.
In the meantime, the US bond yields will play a key role in influencing the USD price dynamics in the absence of any relevant market-moving economic data from the US. Apart from this, traders will take cues from the broader risk sentiment to grab short-term opportunities around the USD/JPY pair.
Technical levels to watch
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