Japanese Yen remains on front foot against US Dollar, lacks bullish conviction

• The Japanese Yen draws support from a combination of factors, albeit lacks follow-through.
• The USD remains depressed below a multi-month low and also exerts pressure on USD/JPY.
• Hawkish Fed expectations favour the USD bulls and should act as a tailwind for the major.

The Japanese Yen (JPY) ticks higher during the Asian session on Wednesday and is now looking to build on its goodish bounce from the YTD low touched against its American counterpart the previous day. Market participants seem convinced that wage growth this year may outpace that of 2023 and pave the way for the Bank of Japan to exit its decade-long ultra-loose monetary policy. Apart from this, persistent worries about geopolitical tensions stemming from conflicts in the Middle East and slowing economic growth in China continue to act as a tailwind for the JPY. This, along with the overnight US Dollar (USD) pullback from its highest level in almost three months, exerts some downward pressure on the USD/JPY pair.

Meanwhile, Japan's real wages fell for a 21st straight month in December and household spending dropped for a tenth consecutive month, which is seen as an unwelcome development for the BoJ. This, along with the underlying bullish tone across the global equity markets, might hold back traders from placing fresh bullish bets around the JPY. Furthermore, the recent upbeat US macro data, including a blowout jobs report on Friday, and recent hawkish remarks by Federal Reserve (Fed) officials smashed expectations for a more aggressive policy easing in 2024. This remains supportive of elevated US Treasury bond yields, which favours the USD bulls and should help limit any meaningful slide for the USD/JPY pair.

Daily Digest Market Movers: Japanese Yen benefits from hopes for an imminent shift in BoJ’s policy stance

• The Japanese Yen draws support from hopes that another substantial pay hike this year will support sustained and stable inflation, and allow the Bank of Japan to pivot away from its ultra-dovish policy stance.
• Geopolitics, along with China's economic woes, remain key risks for the markets, which benefits the safe-haven JPY and exerts pressure on the USD/JPY pair during the Asian session on Wednesday.
• The overnight sharp pullback in the US Treasury bond yields keeps the US Dollar bulls on the defensive and turns out to be another factor contributing to the mildly offered tone surrounding the major.
• Investors continue to scale back their expectations for early and steep rate cuts by the Federal Reserve in the wake of a resilient US economy and the recent hawkish remarks by influential FOMC members.
• Philadelphia Fed President Patrick Harker said on Tuesday that inflation must be moving sustainably lower to open rate cut door and that it would be a mistake to cut interest rates prematurely.
• Harker added that the recent news on inflation has been encouraging, though wage gains are still too high for getting to the 2% target and it is possible that inflation may be more persistent than expected.
• Separately, Minneapolis Fed President Neel Kashkari said that we are not done yet on inflation and most of the disinflationary gains have come from the supply-side, but the data is looking positive.
• This comes on top of Fed Chair Jerome Powell's remarks on Sunday, saying that a strong economy gives the central bank time to evaluate if inflation will continue to fall before starting to cut interest rates.
• The yield on the benchmark 10-year US government bond holds above 4.0%, which supports prospects for the emergence of USD dip-buying and should act as a tailwind for the USD/JPY pair.

Technical Analysis: USD/JPY could decline to 147.00 once the 100-day SMA support is broken decisively

From a technical perspective, this week's failure to find acceptance above the 148.80 level constitutes the formation of a bearish double-top pattern. That said, oscillators on the daily chart – though have been losing traction – are still holding in the positive territory and warrant some caution before positioning for deeper losses. That said, some follow-through selling below the 100-day Simple Moving Average (SMA), currently pegged near the 147.60-147.55 region, could drag the USD/JPY pair further towards the 147.00 round figure. A convincing break below the latter could accelerate the corrective decline further towards the 146.35 intermediate support en route to sub-146.00 levels, or the monthly low touched last week.

On the flip side, momentum back above the 148.00 mark now seems to confront some resistance near the 148.30-148.35 region. Bulls, meanwhile, are likely to wait for a sustained strength beyond the 148.80 double-top resistance before placing fresh bets. The USD/JPY pair might then surpass an intermediate hurdle near the 149.55-149.60 region and aim to reclaim the 150.00 psychological mark.