Japanese Yen remains on the defensive against USD; 100-day SMA caps USD/JPY

• The Japanese Yen ticks lower against the USD following the release of a softer Tokyo CPI report.
• Expectations for an imminent BoJ policy shift and a softer risk tone help limit losses for the JPY.
• Fed rate cut bets keep the USD bulls on the defensive and act as a headwind for the USD/JPY pair.

The Japanese Yen (JPY) edges lower against its American counterpart during the Asian session on Tuesday after data showed that consumer inflation in Tokyo – Japan's capital city – eased more than expected in November. In fact, Tokyo's core CPI, which excludes volatile items such as fresh food, was the closest to the Bank of Japan's (BoJ) 2% annual target since June 2022. This comes on top of the recent less-hawkish remarks by BoJ board members, downplaying the chance of an imminent shift in the policy stance and ending the negative interest rate regime, which turns out to be a key factor undermining the JPY.

Investors, however, seem convinced that the BoJ will eventually begin tightening its ultra-loose policy and end its yield curve control measures during the first few months of 2024. This, along with a softer risk tone, underpins the safe-haven JPY. The US Dollar (USD), on the other hand, struggles to capitalize on the previous day's move up to over a one-week peak amid growing acceptance that the Federal Reserve (Fed) is done with its policy-tightening campaign and will soon start cutting interest rates. This, in turn, keeps a lid on the USD/JPY pair's recovery from a near three-month low touched on Monday.

Traders also seem reluctant to place aggressive bets and prefer to wait for this week's key US macro releases, starting with the ISM Services PMI and JOLTS Job Openings data later this Tuesday. The US ADP report on private-sector employment is due on Wednesday, though the focus will remain glued to the official jobs report – popularly known as the Nonfarm Payrolls on Friday.

Daily Digest Market Movers: Japanese Yen is undermined by a weaker data set

• Data released this Tuesday showed that the headline Tokyo CPI decelerated from 3.3% to the 2.6% YoY rate in November, though it remained above the Bank of Japan's 2% target for the 18th consecutive month.
• The Core CPI, which excludes volatile items such as fresh food, was flat month-on-month and the yearly rate eased more than anticipated, from 2.7% in October to 2.3% during the reported month.
• Another core gauge, which excludes both fresh food and fuel prices and is used as an indicator of underlying inflation by the BoJ, fell from the 3.8% YoY rate in the prior month and came in at 3.6%.
• Investors, however, continue to price in the possibility of an exit from negative interest rate policy by the BoJ in 2024, which, along with a softer risk tone, lends some support to the Japanese Yen.
• The final au Jibun Bank Service PMI came in at 50.8 for November, below the flash reading of 51.7. This was the slowest pace of growth in a year, signalling a further loss of momentum in the services sector.
• An escalation of geopolitical tensions in the Middle East tempers investors' appetite for riskier assets while the overnight rebound in the US bond yields took its toll on tech stocks.
• Bets that the Federal Reserve may begin easing as soon as March 2024 cap the US bond yields and the recent US Dollar recovery from a multi-month low, acting as a headwind for the USD/JPY pair.
• Investors now look forward to the release of the US ISM Services PMI for some impetus later during the North American session, though the focus will remain on the closely-watched NFP report on Friday.

Technical Analysis: USD/JPY struggles to move back above 100-day SMA, 38.2% Fibo. level holds the key for bulls

From a technical perspective, the USD/JPY pair on Monday found some support and attracted buyers near the 146.20 region, representing the 38.2% Fibonacci retracement level of the July-October rally. The subsequent move up, however, fails to make it through the 100-day Simple Moving Average (SMA) pivotal support breakpoint, warranting some caution for bullish traders. That said, a sustained strength beyond could trigger a short-covering rally and allow the USD/JPY pair to reclaim the 148.00 mark. The momentum could get extended further, though is likely to remain capped near the 148.25-148.30 horizontal barrier.

On the flip side, weakness back below the 147.00 mark might expose the multi-month low, around the 146.20 region, or the 38.2% Fibo. level tested on Monday. Some follow-through selling, leading to a subsequent slide through the 146.00 mark, will be seen as a fresh trigger for bearish traders. The USD/JPY pair might then accelerate the fall towards the next relevant support near the 145.45-145.40 region en route to the 145.00 psychological mark and the 50% Fibo. level, around mid-144.00s.