Japanese Yen advances to near three-month high against USD, seems poised to appreciate further

• The Japanese Yen kicks off the new week on a stronger note and touches a three-month high against the USD.
• A combination of factors tempers investors’ appetite for riskier assets and boosts demand for the safe-haven JPY.
• Dovish Fed expectations, falling US bond yields undermine the USD and exert downward pressure on USD/JPY.

The Japanese Yen (JPY) adds to Friday's strong gains against the US Dollar (USD) and kicks off the new week on a positive note, dragging the USD/JPY pair to a near three-week low, around the 146.25-146.20 region during the Asian session. Escalating conflict in the Middle East, along with fears of another COVID-19-like respiratory illness outbreak in China, tempers investors' appetite for riskier assets. This comes on the back of speculations about a major shift in the Bank of Japan's (BoJ) policy stance early next year and turns out to be a key factor that is seen boosting the JPY’s relative safe-haven status.

The JPY bulls, meanwhile, seem rather unaffected by the recent less-hawkish comments by BoJ policymakers, saying that it was premature to debate an exit from negative interest rates. The USD, on the other hand, continues to be undermined by rising bets that the Federal Reserve (Fed) will maintain the status quo at the December policy meeting and start cutting interest rates by the first half of 2024. Even Fed Chair Jerome Powell's attempts on Friday to moderate rate-cut expectations also do little to provide any respite to the buck or ease the bearish pressure surrounding the USD/JPY pair.

Market participants now look to important US macro data scheduled at the beginning of a new month, including the closely-watched US monthly jobs report, or the Nonfarm Payrolls data, due on Friday for some meaningful impetus. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the USD/JPY pair is to the downside. This, in turn, supports prospects for an extension of the recent sharp pullback from the 152.00 neighbourhood, or the YTD peak touched in November amid Monday's thin US economic docket, featuring the only release of Factory Orders data.

Daily Digest Market Movers: Japanese Yen attracts haven flows amid geopolitical tensions and respiratory illness outbreak in China

• A US destroyer and three commercial ships operating in the Red Sea came under drone and ballistic-missile attacks on Sunday.
• and the responsibility for the latest incursion was claimed by Iran-backed Houthi rebels in Yemen.
• This comes after Israel's warplanes pounded Gaza on Friday and talks to extend a week-old truce with Hamas collapsed, and marks a major increase in maritime aggression linked to the prolonged war.
• China's hospitals have been flooded with cases of respiratory illnesses and sick children complaining of pneumonia-like symptoms, leading to increased scrutiny from the World Health Organisation (WHO).
• The Chinese health ministry said on Saturday that the respiratory illness is caused by known pathogens and there is no sign of new infectious diseases and recommended reducing large gatherings in public places.
• BoJ board member Noguchi spoke over the weekend to convey that there is no imminent policy pivot in sight as the rise in inflation is mostly due to cost-push factors amid higher import prices.
• Noguchi added that although annual spring wage negotiations this year achieved hikes unseen in 30 years, we've just reached a stage where the possibility of achieving the 2% inflation target has come into sight.
• Federal Reserve Chairman Jerome Powell said on Friday it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when policy might ease.
• Investors, however, seem convinced with the idea that the Fed is done with the string of rate hikes and will soon move to an easing posture in 2024, which leads to a further decline in the US bond yields.
• The yield on the benchmark 10-year US government bond languishes near a 12-week low and continues to undermine the US Dollar, exerting some downward pressure on the USD/JPY pair on Monday.
• Traders now look to the US Factory Orders data for some impetus ahead of the Tokyo CPI on Tuesday and this week’s other important US macro data scheduled at the beginning of a new month, including the NFP report on Friday.

Technical Analysis: USD/JPY seems vulnerable near multi-month low, 100-day SMA pivotal support breakdown in play

From a technical perspective, the recent failure ahead of the 152.00 mark constituted the formation of a bearish double-top pattern on the daily chart. A subsequent break and close below the 100-day Simple Moving Average (SMA) on Friday further validates the near-term negative outlook for the USD/JPY pair. Spot prices, however, find some support near the 146.20 area, which represents the 38.2% Fibonacci retracement level of the July-October rally and should act as a key pivotal point. Given that oscillators on the daily chart are holding deep in the negative territory, some follow-through selling should drag the pair further towards the 145.45-145.40 intermediate support en route to the 145.00 psychological mark and the 50% Fibo. level, around mid-144.00s.

On the flip side, any attempted recovery might now confront stiff resistance and meet with a fresh supply near the 147.00 mark. This, in turn, should cap the USD/JPY pair near the 100-day SMA support breakpoint, currently pegged near the 147.30-147.35 region. A sustained strength beyond, however, could trigger a short-covering rally and allow spot prices to reclaim the 148.00 round figure. The momentum could get extended further towards the 148.25-148.30 region, or the 23.6% Fibo. level.