The long-awaited shift in policy direction by the Bank of Japan (BoJ) towards tightening has helped the Japanese yen to achieve strong gains against other major currencies, especially the dollar. As a result, the USD/JPY tumbled towards the support level of 140.95, the lowest for the pair in five months. Moreover, from there it tried to rebound higher, but its gains did not exceed the level of 144.95, as downward pressure remained. Recently, USD/JPY is stabilizing around the level of 142.40 at the time of writing the analysis and during the annual holiday week.
In general, asset managers have turned to the bullish direction of the Japanese yen from the bearish direction for the first time since May. This amid a growing view that the BoJ is likely to end its ultra-loose policy in 2024 while its peers from other global central banks are cutting interest rates. Moreover, the latest data from the Commodity Futures Trading Commission (CFTC) for the week ending December 19 also showed a slight decline in bearish bets against the yen by hedge funds.
Recently, the price of the Japanese yen this month reached its strongest level since the end of July against the US dollar. As the Federal Reserve indicated a pivot to reducing US interest rates next year, while speculation still exists that its Japanese counterpart is ready to end the recent negative interest rate policy in the world. Also, the European Central Bank and the Bank of England are expected to cut interest rates next year as inflationary pressures ease.
Overall, USD/JPY risk reversals, which are contracts that show demand for call options to buy the yen compared to put options to sell it, also indicate that traders are hedging to strengthen the Japanese currency. Particularity, the one-month contracts cover the Bank of Japan's next monetary policy meeting on January 22-23.
On the other hand, BNP Paribas remains broadly pessimistic about the US dollar. “In addition, with Fed rate cuts supporting the soft-landing narrative, and as we expect other major central banks to deliver less aggressive rate cuts next year than the Fed, we expect the US dollar to remain in a defensive position.”
Therefore, US data releases during the first quarter of 2023 will be very important. For its part, HSBC Bank is not confident in predicting a weak dollar. It is noted; “Easing fears of the Fed have pushed the US dollar lower, but obstacles to this continuing are increasing, amid slowing global growth and rising expectations of interest rate cuts. Several scenarios still point to a stronger US dollar, but only a global soft landing provides a clear bearish case.”
Accordingly, HSBC expects the strength of the dollar to contribute to losses in the pound/US dollar. Also, MUFG sees the risk of overselling the dollar; “The US interest rate market is already factoring in expectations for earlier and deeper interest rate cuts from the Fed, providing a greater hurdle to more dovish policy surprises,” he said.
USD/JPY Technical analysis and Expectations Today:
According to the performance on the daily chart below, the price of the US dollar against the Japanese yen (USD/JPY) is still inclined towards the downside. Also, the bears’ most important destination is the psychological support level of 140.00, which is the level at which all technical indicators are moving towards strong selling saturation levels. Obviously, it is better to think again about buying the currency pair, as the change in the policy of the Japanese Central Bank, which supported the Japanese yen, may take a period that extends to months. On the other hand, over the same period, the return of the currency pair towards the resistance level of 145.80 will be important for the bulls to control the trend again. In general, central bank policies will determine the direction of the dollar/yen pair in the year 2024.
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