Japanese Yen trades with mild negative bias against USD; eyes BoJ decision on Tuesday

• The Japanese Yen ticks lower against the US Dollar for the second straight day on Monday.
• The prevalent risk-on environment is seen as a key factor undermining the safe-haven JPY.
• The divergent Fed-BoJ policy expectations act as a headwind for USD/JPY and cap gains.
• Traders also seem reluctant to place aggressive bets ahead of the BoJ decision on Tuesday.

The Japanese Yen (JPY) kicks off the new week on the backfoot against its American counterpart, albeit lacks follow-through and remains well within the striking distance of its highest level since late July touched last week. The risk-on rally across the global equity markets remains unabated in the wake of the Federal Reserve’s (Fed) dovish pivot last week. Adding to this, the optimistic outlook from China’s Central Finance Office further boosts investors’ confidence and turns out to be a key factor undermining the safe-haven JPY.

Meanwhile, top Fed officials – New York Fed President John Williams and Atlanta’s Raphael Bostic – on Friday tried to temper speculation about early interest rate cuts. The markets, however, seem convinced that the US central bank will begin easing its policy by the first half of 2024, which fails to assist the USD to build Friday’s recovery from over a four-month low. Adding to this, expectations that the Bank of Japan (BoJ) will phase out loose monetary policy in early 2024 caps the USD/JPY pair near mid-142.00s during the Asian session.

Traders might also refrain from placing aggressive directional bets and prefer to wait for the highly-anticipated BoJ monetary policy decision, scheduled to be announced during the Asian session on Tuesday. This, in turn, warrants some caution before confirming that the USD/JPY pair has formed a near-term bottom around the 141.00 mark. In the run-up to the key central bank event risk, traders on Monday will take cues from the broader risk sentiment and the USD price dynamics in the absence of any relevant macroeconomic releases.

Daily Digest Market Movers: Japanese Yen continues to be underpinned by hopes for a BoJ pivot

• The prevalent risk-on environment is seen undermining the safe-haven Japanese Yen amid a modest US Dollar recovery from over a four-month low touched on Friday.
• State media Xinhua, citing a government readout, reported that China’s economy is expected to see more favourable conditions and more opportunities than challenges in 2024.
• New York Fed President John Williams, in an interview with CNBC, said that we aren’t really talking about rate cuts right now and it’s premature to speculate about them.
• William added that the data can move in surprising ways and the central bank needs to be ready to tighten policy further if the progress on inflation were to stall or reverse.
• Separately, Atlanta Fed President Raphael Bostic said that rate cuts were not an imminent thing and that the first cuts could come sometime in the third quarter of 2024.
• North Korea fired at least one unidentified type of ballistic missile on Monday, just hours after a separate launch of a short-range missile late Sunday night.
• The flash PMI data released on Friday showed that German business activity deteriorated in December, increasing the risk of a recession in Europe’s biggest economy.
• The S&P Global Composite PMI edged higher to 51.0 from 50.7, suggesting that the business activity in the US private sector continues to expand at a modest pace in early December.
• The USD/JPY pair, meanwhile, struggles to move back above mid-142.00s amid rising bets that the Bank of Japan may exit its negative rate policy early next year.

Technical Analysis: USD/JPY remains capped near 200-day SMA, not out of the woods yet

From a technical perspective, last week’s breakdown and close below the very important 200-day Simple Moving Average (SMA) was seen as a fresh trigger for bearish traders. Furthermore, the USD/JPY pair’s inability to move back above the said support-turned-resistance, currently around the 142.55 region, validates the negative outlook. That said, the Relative Strength Index (RSI) on the daily chart remains closer to oversold territory and makes it prudent to wait for some near-term consolidation or a modest bounce before the next leg down.

In the meantime, any further move up is likely to attract fresh sellers near the 142.75-142.80 region and remain capped near the 143.00 round figure. That said, some follow-through buying could trigger a short-covering rally and allow the USD/JPY pair to reclaim the 144.00 mark. On the flip side, the 142.00 round figure now seems to protect the immediate downside ahead of the 141.40-141.35 region, below which spot prices could retest sub-141.00 levels, or a multi-month low touched last Thursday. The subsequent downfall has the potential to drag the pair further towards the 140.00 psychological mark.