Japanese Yen strengthens against USD despite falling rates of inflation in Tokyo

• The Japanese Yen gains positive traction against the USD for the second straight day on Tuesday.
• The JPY bulls shrug off the expected drop in Tokyo inflation closer to the BoJ’s 2% annual target.
• The uncertainty over the Fed’s rate cut trajectory weighs on the USD and drags USD/JPY lower.

The Japanese Yen (JPY) remains on the front foot against its American counterpart for the second successive day on Tuesday and seems rather unaffected by falling rates of inflation in Tokyo – Japan’s capital city. A fresh leg down in the US equity futures is seen as a key factor benefitting the JPY's relative safe-haven status. Apart from this, a softer tone surrounding the US Dollar (USD) drags the USD/JPY pair back below the 144.00 mark during the Asian session.

Meanwhile, government stimulus measures in the wake of a devastating New Year's Day earthquake in Japan could potentially delay the Bank of Japan's (BoJ) plan to pivot away from its ultra-dovish stance. This could act as a tailwind for the JPY and help limit deeper losses for the USD/JPY pair. Traders might also refrain from placing fresh directional bets amid the uncertainty over the timing of when the Federal Reserve (Fed) will start cutting rates.

The US monthly jobs report released last Friday pointed to a still-resilient labor market and gives the Fed more headroom to keep rates higher for longer. Adding to this, the recent less dovish remarks by Fed officials forced investors to scale back their expectations for more aggressive policy easing. This, in turn, makes it prudent to wait for strong follow-through selling before confirming that the USD/JPY pair's recent recovery from a multi-month low has run its course.

Daily Digest Market Movers: Japanese Yen recovers further from a multi-week low touched on Friday

• The Japanese Yen attracts follow-through buying during the Asian session on Tuesday, though the fundamental backdrop warrants some caution for aggressive bullish traders.
• Inflation in Japan’s capital fell as expected, with Tokyo core Consumer Price Index (CPI) inflation, which excludes volatile fresh food prices, rising 2.1% YoY in December.
• A core reading that excludes both fresh food, and fuel prices, and is closely watched by the Bank of Japan as a measure of underlying inflation, eased from 3.6% to 3.5%.
• Adding to this, the headline Tokyo CPI inflation fell from 2.6% in the prior month to an annualized 2.4% in December and is now within spitting distance of the BoJ's annual target.
• This comes on top of a deadly earthquake in Japan and dampens hopes for an imminent shift in the BoJ's dovish stance at the January 22-23 monetary policy meeting.
• The US Dollar remains on the defensive in the wake of last week's mixed US economic data and bets that the Federal Reserve will start easing its monetary policy soon.
• The New York Fed said in a report on Monday that US consumers' projection of inflation over the short run fell to the lowest level in nearly three years in December.
• The latest survey showed that inflation is expected to be at 3% one year from now, or the lowest reading since January 2021, as against a projection of 3.4% in November.
• Investors, however, have been paring bets for early interest rate cuts by the Fed, which remains supportive of elevated US bond yields and should act as a tailwind for the USD.

Technical Analysis: USD/JPY break through 100-hour SMA and 38.2% Fibo. support levels

From a technical perspective, the intraday downfall drags the USD/JPY pair below the 100-hour Simple Moving Average (SMA). A subsequent break through the 38.2% Fibonacci retracement level of the recent strong recovery from a multi-month low touched in December might have already set the stage for further losses. With oscillators on hourly/daily charts holding in the negative territory, spot prices seem vulnerable to slide further towards testing the very important 200-day SMA, currently around the 143.25 region, en route to the 143.00 mark, or the 50% Fibo. level.

On the flip side, the 144.00 round figure now seems to act as an immediate resistance ahead of the 144.25-144.30 region. A sustained strength beyond the latter could trigger a short-covering rally and lift the USD/JPY pair to the 145.00 psychological mark. Some follow-through buying might shift the bias back in favour of bullish traders and allow spot prices to make a fresh attempt to conquer the 146.00 mark with some intermediate barrier near mid-145.00s.