Japanese Yen remains confined in range against USD, looks to BoJ for fresh impetus

• The Japanese Yen struggles for a firm direction as traders keenly await BoJ's decision.
• The BoJ is expected to stick to its ultra-dovish monetary policy settings on Tuesday.
• The divergent BoJ-Fed policy expectations continue to act as a tailwind for USD/JPY.

The Japanese Yen (JPY) extends its sideways consolidative price move against its American counterpart during the Asian session on Tuesday and remains well within the striking distance of the lowest level since November 28 touched last week. Traders seem reluctant to place aggressive directional bets and opt to wait for the highly-anticipated Bank of Japan (BoJ) policy decision. The Japanese central bank is widely anticipated to maintain its Yield Curve Control (YCC) and negative interest rate policy at the end of the two-day meeting. Hence, the market focus will be on the central bank's view on economic activity and prices. Apart from this, comments by BoJ Governor Kazuo Ueda's comments at the post-meeting press conference will be scrutinized for cues about the interest rate outlook, which, in turn, could lead to volatility in the JPY.

Heading into the key central bank event risk, investors have been pushing back expectations for an imminent shift in the BoJ's policy stance amid a devastating New Year's Day earthquake in Japan, weak wage growth data and signs of easing inflation. This marks a big divergence in comparison to expectations that the Federal Reserve (Fed) might wait until May before cutting interest rates in the wake of a still-resilient economy. The hawkish outlook, meanwhile, remains supportive of elevated US Treasury bond yields and acts as a tailwind for the US Dollar (USD). Furthermore, the recent widening of the US-Japan rate differential undermines the JPY and contributes to limiting the downside for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen is undermined by expectations for a BoJ inaction

• The Japanese Yen remains on the back foot amid firming expectations that the Bank of Japan will maintain the status quo at the end of the January monetary policy meeting this Tuesday.
• Reports suggest that the BoJ will revise its forecast for the Consumer Price Index (CPI) through fiscal 2025 and will assess the sustainability of the virtuous cycle between wages and prices.
• The central bank will also publish a quarterly report, or the "Outlook for Economic Activity and Prices", which offers insights into economic growth, inflation risks, and labor market conditions.
• The US Dollar remains well supported by diminishing odds for an early rate cut by the Federal Reserve and the recent upbeat macro data, which suggested that the economy is in good shape.
• The current market pricing indicates a 40% chance of a March rate cut, down from as much as 80% a week ago, and a cumulative of five 25 bps rate cuts for 2024 as compared to six two weeks ago.
• The hawkish outlook allows the yield on the benchmark 10-year US government bond to hold steady at around 4.10%, just below the highest level since December touched last week.
• The conflict in the Middle East is showing no signs of easing, with the drone strikes by Iran-backed Houthi rebels continuing on commercial vessels in the Red Sea.
• Pakistan and Iran have decided to resolve their issues with diplomacy, while the Israel-Hamas conflict is threatening to erupt into a large-scale war and impact the global economy.
• Geopolitical tensions, along with persistent worries about slowing economic growth in China, could benefit the safe-haven JPY and cap any meaningful upside for the USD/JPY pair.

Technical Analysis: USD/JPY consolidates before the next leg up, 100-day SMA holds the key for bulls

From a technical perspective, the range-bound price action witnessed over the past four days comes on the back of the recent breakout through the 100-day Simple Moving Average (SMA) and might still be categorized as a bullish consolidation phase. Moreover, oscillators on the daily chart are holding comfortably in the positive territory, suggesting that the path of least resistance for the USD/JPY pair is to the upside. That said, bulls might still wait for a move beyond a multi-week top, around the 148.80 region touched last week before placing fresh bets. Spot prices might then aim to surpass an intermediate hurdle near the 149.30-149.35 zone and reclaim the 150.00 psychological mark for the first time since November 17.

On the flip side, the 100-day SMA resistance breakpoint, currently around the 147.55 region, offered some support to the USD/JPY pair on Monday and might continue to protect the immediate downside. That said, a convincing break below the said area might prompt some technical selling and drag spot prices to the 147.00 round figure en route to the next relevant support near the 146.60-146.55 area. Any subsequent fall, however, might still be seen as a buying opportunity and is more likely to remain limited near the 146.10-146.00 horizontal support.