Japanese Yen recovers a part of its recent losses against USD ahead of BoJ decision

• The Japanese strengthen a bit against the USD amid reviving safe-haven demand.
• The USD is pressured by bets for early interest rate cuts by the Federal Reserve.
• Traders now look to the crucial BoJ policy decision for a fresh directional impetus.

The Japanese Yen (JPY) ticks higher during the Asian session on Tuesday and for now, seems to have snapped a two-day losing streak against its American counterpart. The uptick could be attributed to some repositioning trade ahead of the crucial Bank of Japan (BoJ) policy decision, which will be followed by Governor Kazuo Ueda's press conference. The Japanese central bank is expected to keep its monetary policy settings unchanged. Investors, meanwhile, will closely scrutinize comments from Ueda for cues on whether economic conditions are falling into place to exit negative interest rates in January. This, in turn, will play a key role in influencing the JPY and provide a fresh directional impetus to the USD/JPY pair.

In the run-up to the key central bank event, concerns over geopolitical risks linked to the conflict in the Middle East seem to benefit the JPY's relative safe-haven status. The US Dollar (USD), on the other hand, continues to be weighed down by the Federal Reserve's (Fed) dovish pivot, despite attempts from several influential FOMC members to push back against market expectations for early interest rate cuts. This further contributes to the USD/JPY pair's ongoing slide, summing up to a fall of around 90 pips from the 143.15 area or a multi-day peak touched on Monday. Meanwhile, the aforementioned fundamental backdrop favours bearish traders and supports prospects for a further near-term depreciating move.

Daily Digest Market Movers: Japanese Yen benefits geopolitical tensions, ahead of BoJ decision

• Yemen's Iran-aligned Houthi militants launched a series of drone and ballistic missile attacks on ships in the southern Red Sea, which it says are a response to Israel's assault on the Gaza Strip.
• US Defence Secretary Lloyd Austin announced the formation of a multinational coalition and the launch of Operation Prosperity Guardian to patrol the Red Sea and address the Houthi threat.
• Ceasefire came to a very abrupt halt after Israel accused Hamas of not abiding by the deal made between them, in terms of who should be released.
• Israeli strikes have been reported across the Gaza Strip overnight, leading to more Palestinian deaths. Hamas says no talks will be held until Israeli bombardment of Gaza stops.
• The risk of a further escalation of geopolitical tensions in the Middle East drives some haven flows towards the Japanese Yen ahead of the crucial Bank of Japan policy decision.
• The Japanese central bank is expected to maintain the status quo, though comments by BoJ Governor Kazuo Ueda could lift expectations for an end to negative rates in January.
• A slew of influential Federal Reserve officials recently tried to push back against market speculations about early interest rate cuts, albeit failed to impress the US Dollar bulls.
• Chicago Fed President Austan Goolsbee said on Monday that he was confused over the market reaction to last week's FOMC meeting and that the central bank is not precommiting to cutting interest rates soon and swiftly.
• Adding to this, Cleveland Fed President Loretta Mester said that financial markets had gotten a little bit ahead of the central bank on when to expect interest rate cuts.
• Mester's comments align with those from two other 2024 voting FOMC members who on Friday stressed that interest rate cuts were not imminent.

Technical Analysis: USD/JPY setup favours bearish traders and supports prospects for further losses

From a technical perspective, the overnight failure to find acceptance above the 143.00 mark and the subsequent fall favours bearish traders. Moreover, oscillators on the daily chart are holding deep in the negative territory and suggest that the path of least resistance for the USD/JPY pair is to the downside. That said, it will still be prudent to wait for some follow-through selling below the 142.00 round figure before positioning for any further depreciating move. Spot prices might then accelerate the slides towards the 141.45-141.40 intermediate support before dropping to sub-141.00 levels, or a multi-month low touched last Thursday.

On the flip side, a sustained move beyond the overnight swing high, around the 143.15 region, could prompt a short-covering rally and allow the USD/JPY pair to reclaim the 144.00 mark. The latter should act as a key pivotal point, which if cleared decisively will suggest that the recent downtrend witnessed over the past month or so has run its course and shift the near-term bias in favour of bullish traders. Spot prices might then accelerate the positive move towards the 144.75 region en route to the 145.00 psychological mark.