USD/JPY analysis: Currency Pair of the Week - Dec 18, 2023

• USD/JPY analysis: will the BoJ deliver a surprise?
• Core PCE Price Index among week’s key data highlights
• USD/JPY back above 200-day MA for now

With the Bank of Japan being the last major central bank decision left for this year and the last important macro releases of the year to come this week, the USD/JPY is the featured currency pair of the week. Ahead of the BoJ’s policy decision, we are witnessing a bit of an oversold bounce, which is not a major surprise by any means. Indeed, the risks remain skewed to the downside, which means there is the potential for further weakness in USD/JPY once this phase of profit-taking abates.

Can the USD/JPY fall even more?

Tracking bond yields lower, the USD/JPY has had a tough time in the last one and a half months. The pair has dropped from a peak of 151.91 in mid-November, to a low so far of 140.95 last week. This is more than a 1,000-pip drop or about 7.2%, which is not insignificant by any means. While it has bounced back in the last couple of trading sessions due to some “bargain hunting” amid oversold conditions, the downside may not be done just yet. With the Fed pivoting to a more dovish stance, yields could fall even more in the days and – as we move into a new year – weeks ahead. This should further reduce the appeal of the higher-yielding US dollar compared to some of the lower-yielding currencies, such as the Japanese yen. So, the USD/JPY’s selling may not be over just yet, especially if the BoJ turns out to be more hawkish than expected. Speaking of…

USD/JPY analysis: will the BoJ deliver a surprise?

The Bank of Japan is the last major central bank to announce its final monetary policy of the year on Tuesday, after the FOMC, ECB, BoE and SNB all kept their respective policies unchanged last week. The BoJ has remained the only major bank not to tighten its policy at all, but the pressure is growing on it to end the era of negative rates. Governor Kazuo Ueda’s recent comments have boosted expectations of a near-term shift in rates. However, this meeting might come too soon for that. The BoJ is slowly getting the market ready for its first hike in 16 years, which could come around April time. But will it deliver a surprise at this meeting? Even if it doesn’t, any hints of a near-term policy shift could potentially move the Japanese yen sharply.

Core PCE Price Index is week’s key data highlight

The economic calendar is winding down ahead of Christmas and New Year holiday. This week, we will have the last important macro releases of the year. As well as the BoJ meeting, we have a few data releases from the US, including Friday’s publication of the Fed’s favourite inflation measure. Here’s the full list of the important macro events relevant for the USD/JPY pair to watch this week:

Despite a slightly stronger CPI report last week, the Federal Reserve caused the dollar to sell off and sent stocks and gold sharply higher after signalling a definitive end to its aggressive rate-hiking. The FOMC projected three rate cuts in the coming year. For the first time since March 2021, policymakers did not foresee any additional interest-rate increases in their projections. But US economic data has remained mixed, and if that trend continues markets may have to re-assess their views and push their rate cut expectations deeper into 2024. The Fed’s favourite inflation measure, the Core PCE Price index certainly has the potential to cause that shift. A weaker print would be welcomed by the markets – and the USD/JPY bears

USD/JPY analysis: Key levels to watch

Source: TradingView.com

The USDJPY found some mild support around 142.00 area at the end of last week and the recovery has continued for now, with the pair poking its head back above the 200-day moving average.

The short-term trend turned bearish after the USD/JPY’s sharp drop in the last 1.5 months from above 150.00 to near 140.00. We have a few lower highs now in place and the 21-day exponential moving average is pointing lower.

On Friday, the USD/JPY formed a small inside bar candle, meaning the day’s price action was contained inside the previous day’s range. The consolidation was as a result of stronger PMI data from the US services sector which helped the dollar across the board, encouraging the USD/JPY bears to book some profit. Now, Friday’s high comes in at just below 142.50. The USD/JPY bulls will need to defend this level moving forward, else we could see the selling extend towards 140.00 if the potential bullish failure triggers more technical selling.

On the upside, interim resistance comes in at around 142.80, above which is there is nothing significant seen until Tuesday’s low at 144.74 and then the key 145.00 level.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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