Japanese Yen languishes near its lowest level since November against USD

• The Japanese Yen consolidates near a multi-week low touched against the USD on Wednesday.
• Expectations that the BoJ will stick to its dovish stance in January continue to undermine the JPY.
• Reduced bets for a March Fed rate cut and elevated US bond yields act as a tailwind for the USD.

The Japanese Yen (JPY) is seen oscillating in a narrow band during the Asian session on Thursday and consolidating its recent heavy losses against the US Dollar (USD) registered since the beginning of this week. A powerful earthquake that hit Japan on New Year’s Day makes it harder for the Bank of Japan (BoJ) to abolish negative interest rates next week. Adding to this, falling rates of inflation in Tokyo – Japan's capital city – and weaker wage data released last week reaffirmed market expectations that the Japanese central bank will stick to its ultra-dovish stance. This, in turn, is seen as a key factor undermining the JPY and assisting the USD/JPY pair to stand tall near its highest level since November 28, around mid-148.00s touched on Wednesday.

The USD, on the other hand, remains well supported by diminishing odds for an imminent rate cut from the Federal Reserve (Fed) in March. The expectations were reaffirmed by stronger-than-expected US Retail Sales data, which pointed to signs of a stronger consumer and suggested that the economy remains in good shape. This, in turn, pushed the US Treasury bond yields sharply higher, widening the US-Japan rate differential and contributing to driving flows away from the JPY. Meanwhile, the market sentiment remains fragile in the wake of a further escalation of military action in the Middle East and China's economic woes. This, in turn, benefits the JPY's relative safe-haven status and caps the upside for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen remains vulnerable amid divergent BoJ-Fed expectations

• The Japanese Yen continues to be undermined by the growing acceptance that the Bank of Japan is unlikely to pivot away from its ultra-dovish stance at the January 22-23 policy meeting.
• Wednesday's upbeat US macro data further dashed expectations for an imminent shift in the Federal Reserve's policy stance as soon as March and acts as a tailwind for the US Dollar.
• The Commerce Department reported that the headline US Retail Sales increased more than anticipated, by 0.6% in December, while sales excluding autos also topped market estimates.
• The data points to still-resilient consumer spending and the underlying strength that the US economy possessed, which gives the Fed more headroom to keep rates higher for longer.
• This comes after Fed Governor Christopher Waller said on Tuesday that the central bank should not rush to cut interest rates until it was clear lower inflation would be sustained.
• The yield on the benchmark 10-year US government bond climbed further beyond the 4% mark, hitting the highest level since December 13, and continued lending support to the buck.
• Geopolitical tensions and unimpressive economic growth figures from China temper investors' appetite for riskier assets, benefitting the safe-haven JPY and capping the USD/JPY pair.
• In the latest development surrounding the Israel-Hamas war, Yemen’s Houthi rebels targeted a US-owned cargo ship with a kamikaze drone in the Red Sea late Wednesday.
• Data released on Wednesday showed that China’s economy expanded at an annual rate of 5.2% in the final quarter of 2023, slightly more than the official 5% growth target.
• However, a deepening property crisis, mounting deflationary risks and tepid demand cast doubts over the shakier recovery for the world's second-largest economy.

Technical Analysis: USD/JPY bulls have the upper hand above 100-day SMA/61.8% Fibo. confluence

From a technical perspective, the overnight sustained breakout and acceptance above the 147.50 confluence hurdle was seen as a fresh trigger for bullish traders. The said area comprises the 100-day Simple Moving Average (SMA) and the 61.8% Fibonacci retracement level of the November-December downfall, which, in turn, should act as a key pivotal point. Any subsequent slide is more likely to attract fresh buyers near the 147.00 round figure. This should help limit the downside for the USD/JPY pair near the 146.60-146.50 region.

On the flip side, the 148.50 area, or a multi-week peak set on Wednesday, now seems to act as an immediate barrier. Given that oscillators on the daily chart are holding in the positive territory and are still far from being in the overbought zone, some follow-through buying has the potential to lift the USD/JPY pair to the 149.00 mark. The momentum could extend further towards the 149.70-149.75 region before spot prices aim to conquer the 150.00 psychological mark.