USDJPY bounces off daily low, keeps the red around mid-139.00s amid fresh USD slump

The USDJPY pair retreats nearly 150 pips from the daily swing high and drops to a fresh intraday low, around the 139.20-139.15 region during the first half of the European session.

The US Dollar comes under renewed selling pressure on Tuesday and hits a fresh three-month low, which, in turn, is seen as a key factor exerting downward pressure on the USDJPY pair. Indications that the worst of the post-pandemic price spike is over reaffirmed expectations that the Federal Reserve will slow the pace of its policy tightening in the coming months. In fact, Fed fund futures point to over a 90% chance of a 50 bps rate hike at the next FOMC meeting in December and continues to weigh on the greenback.

The repricing of the pace of the Fed's rate-hiking cycle is evident from a further decline in the US Treasury bond yields. The resultant narrowing of the US-Japan rate differential offers some support to the Japanese Yen and further contributes to the offered tone surrounding the USDJPY pair. That said, speculations that the Bank of Japan will stick to its dovish policy stance, bolstered by Tuesday's weaker domestic growth figures, could act as a headwind for the Japanese Yen. This could limit losses for the major.

Government data released this Tuesday showed that the Japanese economy unexpectedly contracted at an annual rate of 1.2% during the July-September quarter. The reading was well below the 4.6% growth recorded in the second quarter and a 1.1% expansion estimated. Furthermore, a generally positive tone around the equity markets, which tends to undermine the safe-haven JPY, supports prospects for the emergence of some buying around the USDJPY pair. This, in turn, warrants caution before positioning for a further slide.

Yet against this must be weighed the fragile technicals: USDJPY recently broke clean through a major multi-month trendline and out of a long-term rising channel. Unless it can quickly retrace the break and climb back inside the channel the odds favour further declines. Usually channel breakouts lead to a 61.8% to 100% extension of the height of the channel lower, which suggests a conservative target of around 135.60. The 200-day Simple Moving Average lies at 132.95 and provides another target, whilst a 100% extension of the channel lower would reach somewhere in the region of 132.00. A break below the 138.40 lows would provide the confirmation of more weakness. 

Market participants now look forward to the US economic docket - featuring the release of the Empire State Manufacturing Index and Producer Price Index (PPI) later during the early North American session. Apart from this, speeches by influential FOMC members and the US bond yields will drive the USD demand. This, along with the broader risk sentiment, might contribute to producing some trading opportunities around the USDJPY pair.

Technical levels to watch