Japanese Yen retreats from one-week high against US Dollar on softer inflation data

• The Japanese Yen loses traction in reaction to softer inflation figures from Japan.
• Dovish Fed expectations undermine the USD and should cap the USD/JPY pair.
• Traders now look to the US Core PCE Price Index for some meaningful impetus.

The Japanese Yen (JPY) struggles to build on its strong gains registered over the past two days against the US Dollar (USD) and ticks lower during the Asian session on Friday. Japan’s core Consumer Price Index (CPI) eased a bit in November, as was widely expected, raising uncertainty over the timing of when the Bank of Japan (BoJ) will pivot away from its ultra-dovish stance. Moreover, minutes of the BoJ October monetary policy meeting showed that members agreed to the need to patiently maintain the current easy policy, which, in turn, is seen undermining the JPY.

Inflation in Japan, meanwhile, remains well above the BoJ's 2% target. Apart from this, hopes that wage growth next year may outpace that of 2023 suggest that the central bank is more likely to begin tightening its policy as soon as April, if not in January. In contrast, the current market pricing indicates that the Federal Reserve (Fed) could start cutting interest rates as early as March 2024. This, along with a downward revision of the US Q3 GDP print, keeps the USD bulls on the defensive and should cap the USD/JPY pair's modest bounce from the weekly low touched earlier today.

The aforementioned fundamental backdrop seems tilted in favour of the JPY bulls and suggests that the path of least resistance for the USD/JPY pair is to the downside. Traders, however, seem reluctant to place aggressive directional bets and prefer to wait for the release of the US Core Personal Consumption Expenditure (PCE) Price Index later during the North American session. The key US inflation data will play a key role in influencing the Fed's future policy decisions, which, in turn, will drive the USD demand in the near term and provide a fresh directional impetus to the major.

Daily Digest Market Movers: Japanese Yen is undermined by doubts over a potential BoJ pivot

• Japan’s core Consumer Price Index (CPI) slowed from the prior month’s print of 2.9% and rose 2.5% in November from a year earlier, marking its slowest pace since August 2022.
• Furthermore, a core reading that excludes both fresh food and fuel prices eased to 3.8% year-on-year from 4% in October, suggesting that the underlying inflation was also easing.
• Meanwhile, headline CPI decelerated from the 3.3% seen in the prior month to 2.8% year-on-year in November, raising doubt over the possibility of a Bank of Japan policy pivot.
• All three inflation measures, however, remain well above the BoJ's 2% target and support prospects for an imminent shift in the central bank's ultra-dovish policy stance.
• Minutes of the BoJ October monetary policy meeting showed that several members backed the case to sustain the Yield Curve Control (YCC) policy to continue supporting wage growth.
• The US Dollar languishes near a multi-month low on the back of bets that the Federal Reserve will start easing its policy early next year and a downward revision of the US Q3 GDP.
• The third and final reading from the US Bureau of Economic Analysis showed that the world's largest economy expanded by a 4.9% annualized pace vs. a 5.2% rise in the second estimate.
• Separately, the Labor Department reported that Initial Weekly Jobless Claims rose slightly, by 2K to 205K during the week that ended December 16, though remained at historically low levels.
• Investors now await the crucial US core Personal Consumption Expenditure (PCE) Price Index, which is expected to rise by 0.2% in November and come in at 3.3% on a yearly basis.
• Friday's US economic docket also features the release of Durable Goods Orders, which will influence the USD and produce short-term opportunities around the USD/JPY pair.

Technical Analysis: USD/JPY might confront resistance and remain capped near 200-day SMA

From a technical perspective, spot prices showed some resilience below the 142.00 mark and for now, seem to have snapped a two-day losing streak. That said, the overnight breakdown back below the very important 200-day Simple Moving Average (SMA) favours bearish traders. Moreover, oscillators on the daily chart are holding deep in the negative territory, suggesting that the path of least resistance for the USD/JPY pair is to the downside. Hence, any subsequent move up might still be seen as a selling opportunity and remain capped near the 142.75 region (200-day SMA). That said, some follow-through buying, leading to a subsequent move beyond the 143.00 mark, might prompt some short-covering move and allow bulls to reclaim the 144.00 round figure.

On the flip side, weakness below the Asian session low, around the 141.90-141.85 region, will reaffirm the near-term bias and make the USD/JPY pair vulnerable to retesting sub-141.00 levels, or a multi-month low touched last week. The subsequent downfall has the potential to drag spot prices towards the 140.45 intermediate support en route to the 140.00 psychological mark.