Japanese Yen remains on the defensive against USD amid BoJ’s dovish policy stance

• The Japanese Yen struggles to attract buyers in the wake of BoJ’s inaction on Tuesday.
• The prevalent risk-on mood further undermines the JPY and lends support to USD/JPY.
• Bets for a dovish pivot by the Fed weigh on the USD and act as a headwind for the pair.

The Japanese Yen (JPY) weakened across the board on Tuesday after the Bank of Japan (BoJ) decided to maintain the status quo and stick to its ultra-loose monetary policy settings. The central bank also made no changes to its dovish policy guidance and disappointed some investor's hopes for a language to signal a near-term shift away from negative interest rates. This, along with the recent risk-on rally across the global equity markets, weighed heavily on the safe-haven JPY and pushed the USD/JPY pair to a four-day high.

The strong intraday positive move, however, ran out of steam just ahead of the 145.00 psychological mark amid the emergence of fresh selling around the US Dollar (USD). The Federal Reserve (Fed) took a dovish turn last week and projected an average of three 25 basis points (bps) of rate cuts in 2024, which continues to undermine the Greenback. Meanwhile, a slew of influential Fed officials recently downplayed speculations about an imminent shift in the US central bank's policy stance, albeit did little to impress the USD bulls.

The USD/JPY pair retreated over 100 pips intraday and finally settled below the 144.00 mark, though it lacked follow-through and traded with a positive bias for the fourth straight day on Wednesday. Japan's trade data showed that both exports and imports dropped more than expected in November. This, along with the BoJ-Fed policy divergence, exerts pressure on the JPY and assists the pair in attracting buyers during the Asian session. Traders now look to the Conference Board's US Consumer Confidence Index for a fresh impetus.

The focus, however, will remain glued to the release of the US Core Personal Consumption Expenditure (PCE) Price Index – the Fed's preferred inflation gauge on Friday. The key US inflation reading will be looked upon for fresh clues about the Fed's future policy decisions, which, in turn, will drive the USD demand and provide a fresh directional impetus to the USD/JPY pair. In the meantime, the aforementioned supportive fundamental backdrop might continue to act as a tailwind for spot prices and limit any corrective pullback.

Daily Digest Market Movers: Japanese Yen continues to be weighed down by BoJ’s decision to stand pat

• The Bank of Japan decided to leave its ultra-loose monetary policy unchanged on Tuesday and gave no sign that negative rates were set to end, which, in turn, is seen undermining the Japanese Yen.
• In the post-meeting press conference, BoJ Governor Kazuo Ueda reiterated that the central bank won't hesitate to take additional easing measures and will keep scrutinising the wage-price virtuous cycle.
• Data released this Wednesday showed that Japan's trade deficit narrowed to ¥776.9 billion in November, with imports falling 11.9% and exports dipping 0.2% on the back of weak Chinese demand.
• The prevalent risk-on environment is seen as another factor denting the JPY's relative safe-haven status, though the underlying bearish tone around the US Dollar should cap gains for the USD/JPY pair.
• Growing acceptance that the Federal Reserve will pivot to easing and start cutting interest rates by the first half of 2024 drags the Greenback back closer to a multi-month trough touched last week.
• Chicago Fed President Austan Goolsbee, in an interview with Fox TV, cautioned that markets have gotten ahead of themselves and the central bank should not be bullied by what the market wants.
• The US Census Bureau reported on Tuesday that Housing Starts surged 14.8% in November to 1.56 million units, while Building Permits declined 2.5% after rising 1.8% (revised from 1.1%) in October.
• The USD bulls, meanwhile, seem unimpressed by the fact that a slew of influential FOMC members recently pushed back against market expectations for early interest rate cuts in 2024.
• Traders now look to the release of the Conference Board's Consumer Confidence Index, though the focus will remain on a key US inflation reading – the US Core PCE Price Index on Friday.

Technical Analysis: USD/JPY fails ahead of 145.00 mark on Tuesday, 23.6% Fibo. level holds the key for bulls

From a technical perspective, the post-BoJ rally falters near the 38.2% Fibonacci retracement level of the November-December downfall from the 152.00 neighbourhood. The said barrier is pegged near the 145.00 mark, which should now act as an immediate strong resistance and a key pivotal point. A sustained strength beyond will suggest that the USD/JPY pair has formed a near-term bottom and pave the way for some meaningful appreciating move. The subsequent move-up has the potential to lift spot prices to the next relevant hurdle near the mid-145.00s en route to the 146.00 round figure and the 50% Fibo. level, around the 146.40 region.

On the flip side, weakness below the 143.55-143.50 region, representing the 23.6% Fibo. level, could find some support near the 143.00 round figure. This is followed by a technically significant 200-day Simple Moving Average, currently pegged near the 142.65 zone, which if broken decisively will shift the bias back in favour of bearish traders. The USD/JPY pair might then turn vulnerable to weaken further below the 142.00 mark and accelerate the slide to the 141.75 horizontal support before aiming to retest sub-141.00 levels, or a multi-month low touched last week.