Japanese Yen remains confined in a range against USD, awaits fresh catalyst

• The Japanese Yen continues to draw support from the BoJ’s hawkish tilt earlier this month.
• The recent USD pullback from a multi-month top further exerts some pressure on USD/JPY.
• Reduced Fed rate cut bets favour the USD bulls and should limit deeper losses for the pair.

The Japanese Yen (JPY) struggles to gain any meaningful traction during the Asian session on Thursday and remains below the weekly top touched against its American counterpart the previous day. Investors now seem convinced that wage growth this year may outpace that of 2023 and pave the way for the Bank of Japan (BoJ) to exit its decade-long ultra-loose monetary policy, which, in turn, acts as a tailwind for the JPY. Apart from this, the recent US Dollar (USD) pullback from its highest level in almost three months touched earlier this month acts as a headwind for the USD/JPY pair.

The downside for the USD, however, seems limited as investors recently scaled back their expectations for early and steep rate cuts by the Federal Reserve (Fed) in the wake of a resilient US economy and hawkish remarks by several FOMC members. This remains supportive of elevated US Treasury bond yields and favours the USD bulls. Apart from this, the prevalent risk-on mood, as depicted by an extended rally across the global equity markets, could undermine the JPY's relative safe-haven status and help limit the downside for the USD/JPY pair, warranting some caution for bearish traders.

Investors might also refrain from placing aggressive bets and prefer to wait for more cues about the likely pace of Fed rate cuts this year. Hence, the focus will remain glued to the latest US consumer inflation figures, due for release next week, which will play a key role in influencing the Fed's future policy decisions. This, in turn, should drive the USD demand in the near term and provide some meaningful impetus to the USD/JPY pair. In the meantime, traders on Thursday will take cues from the US Weekly Initial Jobless Claims and comments by Fed officials.

Daily Digest Market Movers: Japanese Yen is underpinned by hopes for an imminent BoJ policy shift

• The Bank of Japan earlier this month signalled conviction on hitting the inflation goal and set the stage to pull interest rates out of negative territory at its upcoming meetings in March or April, underpinning the Japanese Yen.
• BoJ Governor Kazuo Ueda had said that if the central bank gets evidence that a positive wage-inflation cycle will heighten, it would examine the feasibility of continuing with various steps under the massive stimulus programme.
• Japan's biggest business lobby Keidanren and trade unions kicked off annual labour talks and big firms are expected to offer the highest wage increase in 31 years this year, paving the way for a shift in the BoJ's policy stance.
• BoJ Executive Director Tokiko Shimizu said this Thursday that inflation has so far has been driven by cost-push factors and that even if negative rates are abandoned, accommodative conditions would remain in place.
• BoJ Deputy Governor Uchida Shinichi said that Japan's real interest rate is in deep negative territory and monetary conditions are very accommodative, which is not expected to change in a big way.
• Shinichi added that the likelihood of sustainably achieving our price target gradually heightening, though the BoJ won't hike rates aggressively even after ending negative rate as the uncertainty over the outlook remains high.
• The US Dollar extends this week's profit-taking slide from the highest level since November 14 and contributes to capping the upside for the USD/JPY pair, though hawkish Federal Reserve expectations could limit losses.
• The incoming US macro data suggested that the economy remains in good shape and gives the Fed more headroom to keep interest rates higher for longer, which, in turn, should continue to act as a tailwind for the buck.
• Several FOMC members, including Fed Chair Jerome Powell, don’t see an urgent case for lowering interest rates, suggesting that a rate cut isn’t likely until the May monetary policy meeting at the earliest.
• Fed Governor Adriana Kugler said on Wednesday that she is optimistic that inflation progress will continue, but stopped short of offering a timeline for when officials may be able to reduce borrowing costs.
• Boston Fed President Susan Collins said that she is looking for more evidence that inflation is on track toward the 2% target before moving to cut interest rates, though that step is more likely later this year.
• Minneapolis Fed chief Neel Kashkari noted that officials would like to see a few more months of inflation data before cutting interest rates and added that he thinks two to three cuts will be appropriate for 2024.
• Richmond Fed President Tom Barkin urged patience and said that it is a good idea for the central bank to take its time with interest-rate cuts given all of the uncertainty about where the US economy is headed.
• The yield on the benchmark 10-year US government bond holds comfortably above the 4.0% market and supports prospects for the emergence of some USD dip-buying, warranting caution for the USD/JPY bears.

Technical Analysis: USD/JPY remains confined in a familiar range above 100-day SMA pivotal support

From a technical perspective, bears need to wait for some follow-through selling below the 100-day Simple Moving Average (SMA), currently pegged near the 147.60-147.55 region, before positioning for deeper losses. The USD/JPY pair might then accelerate the fall to the the 147.00 mark before dropping to the 146.35 intermediate support en route to sub-146.00 levels, or the monthly low touched last week.

Meanwhile, positive oscillators validate the positive outlook for the USD/JPY pair, though the formation of multiple-tops near the 148.75-148.80 region warrants caution for bullish traders. Hence, a sustained strength beyond the said barrier might trigger a fresh bout of a short-covering rally and lift spot prices to the 149.55-149.60 intermediate hurdle en route to the 150.00 psychological mark.