Japanese Yen rebounds from one-week low, upside potential seems limited

• The Japanese Yen attracts some buyers amid geopolitical risks and intervention fears.
• Fading hopes for an imminent shift in the BoJ’s policy stance might cap further gains.
• The Fed’s higher-for-longer narrative underpins the USD and lends support to USD/JPY.

The Japanese Yen (JPY) ticks higher against its American counterpart during the Asian session on Friday and for now, seems to have snapped a two-day losing streak to over a one-week low touched the previous day. The recent verbal intervention by Japanese authorities and persistent geopolitical tensions turn out to be key factors lending some support to the safe-haven JPY. That said, any meaningful appreciating move still seems elusive in the wake of bets for a delay in the Bank of Japan’s (BoJ) plans to end its ultra-loose policies, bolstered by data showing that Japan's economy fell into a technical recession in the fourth quarter.

In contrast, the minutes of the late January FOMC meeting revealed that policymakers are in no rush to cut interest rates amid sticky inflation and the still-resilient US economy. This remains supportive of elevated US Treasury bond yields, which, along with Thursday's mostly upbeat US macro data, could assist the US Dollar (USD) to build on the overnight solid rebound from a nearly three-week low. Apart from this, the prevalent risk-on environment – as depicted by an extended rally across the global equity markets – might cap gains for the JPY and suggests that the path of least resistance for the USD/JPY pair is to the upside.

Daily Digest Market Movers: Japanese Yen struggles to lure buyers amid BoJ policy uncertainty

• Attacks on commercial vessels in the Red Sea by Yemen's Iran-aligned Houthi rebels show no sign of abating despite US and UK strikes, raising the risk of further military action and benefiting the safe-haven Japanese Yen.
• Japan's Ministry of Finance and the Bank of Japan recently warned that they’re watching the exchange rate closely and are willing to intervene in the market to stem any further weakness in the domestic currency.
• Data released last week showed that Japan's economy unexpectedly entered a technical recession during the fourth quarter, fuelling speculations that the BoJ might delay its plans to exit the ultra-easy policy regime.
• On the other hand, the FOMC meeting minutes on Wednesday, along with comments by a slew of influential Federal Reserve officials, reiterated the message that the central bank will keep interest rates higher for longer.
• Fed Vice Chair Philip Jefferson said on Thursday that he was cautiously optimistic about progress on inflation and that he will be looking at the totality of data when weighing interest rate cut options, not a single indicator.
• Separately, Philadelphia Fed President Patrick Harker noted that the central bank is approaching the point of cutting interest rates, though policymakers remain unsure of when specifically, that might happen.
• Furthermore, Fed Governor Lisa Cook believes that the current monetary policy stance is restrictive and would like to have greater confidence that inflation is converging to 2% before beginning interest rate cuts.
• Meanwhile, Fed Governor Christopher Waller expects the FOMC to begin lowering at some point this year, but he will need more evidence to see that inflation is cooling before he is willing to support interest rate cuts.
• According to the CME FedWatch Tool, the current market pricing indicates about a 30% chance that the Fed will start cutting interest rates in May, much lower than a more than over 80% chance a month ago.
• Adding to this, fresh signs of strength in the US labor market remain supportive of elevated US Treasury bond yields, which favours the US Dollar bulls and should lend some support to the USD/JPY pair.
• The US Department of Labor reported that the number of Americans applying for unemployment insurance benefits declined to 201K during the week ending February 17 from the 213K in the previous week.
• The better-than-expected release of the flash PMI prints showed that the downturn in the Eurozone business activity eased in February, which further boosted investors’ sentiment and should cap gains for the JPY.

Technical Analysis: USD/JPY bulls need to wait for move beyond 150.90 before placing fresh bets

From a technical perspective, any meaningful pullback is likely to find decent support near the 150.00 psychological mark. This is followed by the weekly low, around the 149.70-149.65 region, which if broken could drag the USD/JPY pair further towards the 149.35-149.30 horizontal support en route to the 149.00 mark. Some follow-through selling below the 148.80-148.70 strong horizontal resistance breakpoint might shift the bias in favour of bearish traders and pave the way for deeper losses.

On the flip side, bulls might still wait for a sustained strength beyond the 150.85-150.90 area, or a multi-month top touched last week, before placing fresh bets. Given that oscillators on the daily chart are holding comfortably in the positive territory and are still away from being in the overbought zone, the USD/JPY pair might then climb to the 151.45 hurdle. The momentum could extend towards the 152.00 neighbourhood, or a multi-decade peak set in October 2022 and retested in November 2023.