Japanese Yen struggles near two-week low against USD; bulls starting to lose grip

• The Japanese Yen meets with a fresh supply in reaction to the dismal domestic data.
• An uptick in the US bond yields acts as a tailwind for the USD and the USD/JPY pair.
• Expectations of a hawkish BoJ pivot should help limit any meaningful fall for the JPY.

The Japanese Yen (JPY) loses traction on Thursday, following an Asian session uptick, and hangs near a two-week low against the US Dollar (USD). Data released this Thursday showed that Japan's factory activity contracted at the steepest pace in 10 months during December. This comes on top of a devastating 7.6 magnitude earthquake on New Year's Day and turns out to be a key factor undermining the JPY. Meanwhile, minutes from the Federal Reserve's (Fed) December policy meeting did little to offer any cues about the timing of when rate cuts might commence. This leads to a modest bounce in the US Treasury bond yields and acts as a tailwind for the USD, which, in turn, is further seen lending support to the USD/JPY pair.

The markets, however, have priced in a greater chance of a 25-basis point (bps) Fed rate cut in March, which should cap a one-week-old rally in the US Treasury bond yields. Furthermore, the growing market conviction that the Bank of Japan (BoJ) will shift away from negative interest rates and Yield Curve Control (YCC) policies in April, after the annual wage negotiations in March, should help limit losses for the domestic currency. Apart from this, a generally weaker tone around the equity markets is seen as another factor benefitting the JPY's relative safe-haven status. Traders might also refrain from placing aggressive directional bets and prefer to move to the sidelines ahead of the crucial US monthly jobs report, or the Nonfarm Payrolls (NFP) on Friday.

Daily Digest Market Movers: Japanese Yen turns lower for the third successive day against US Dollar

• The Japanese Yen surrenders its modest Asian session gains in the wake of weaker domestic data, though a combination of supporting factors should help limit deeper losses.
• The au Jibun Bank Japan Manufacturing PMI remained in contraction territory for the seventh straight month and shrank to 47.9 in December – its weakest reading since February.
• The anticipation of a reversal in policy divergence between the Bank of Japan (BoJ) and the Federal Reserve (Fed) in 2024 should continue to lend some support to the JPY.
• Minutes of the December 12-13 FOMC meeting reflected a consensus that inflation is under control and concern about the risks that overly restrictive policy may pose to the economy.
• The minutes, however, did not provide direct clues about when rate cuts might commence, which, in turn, is seen acting as a tailwind for the US bond yields and the US Dollar.
• The Institute for Supply Management (ISM) said on Wednesday that the pace of decline in the US manufacturing sector slowed amid a modest rebound in production and improvement in factory employment.
• The US ISM Manufacturing PMI improved to 47.4 last month after being unchanged at 46.7 for two straight months, though remained in contraction territory for the 14th consecutive month.
• Separately, the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) showed that employment listings fell to 8.79 million in November – the lowest since March 2021.
• Investors now look to the US ADP report, which is expected to show that private-sector employers added 115K jobs in December as compared to the 103K in the previous month.
• The market focus, however, will remain glued to the official monthly employment details – popularly known as the Nonfarm Payrolls (NFP) report on Friday.

Technical Analysis: USD/JPY finds acceptance above 200-day SMA; could prolong the positive move

From a technical perspective, the overnight move beyond the 143.00-143.10 confluence, comprising the 200-day Simple Moving Average (SMA) and the 23.6% Fibonacci retracement level of the November-December downfall, favours bullish traders. That said, oscillators on the daily chart – though have been recovering from lower levels – are yet to confirm a positive bias. Hence, it will be prudent to wait for some follow-through buying before confirming that the USD/JPY pair has formed a near-term bottom and positioning for any further appreciating move.

In the meantime, the overnight swing high, around the 143.70-143.75 region, is likely to act as an immediate hurdle ahead of the 144.00 round figure. A sustained strength beyond the latter will reaffirm the positive outlook and lift the USD/JPY pair towards the 38.2% Fibo. level, around the 144.65 zone. The upward trajectory could get extended further and allow bulls to aim back towards reclaiming the 145.00 psychological mark.

On the flip side, the Asian session low, around the 142.85 region, coinciding with the very important 200-day SMA, might continue to protect the immediate downside. A convincing break below could make the USD/JPY pair vulnerable to accelerate the slide back towards the 142.00 mark. The next relevant support is pegged near the 141.75 horizontal zone, below which spot prices could weaken to the 141.00 round figure en route to the 140.75 intermediate support before eventually dropping to a multi-month low, around the 140.25 region.