The US dollar has pulled back from its strongest start to a year in more than a decade, as speculators have piled into bets against the currency, convinced that slowing US inflation will allow the Federal Reserve to start cutting US interest rates this year. Therefore, the upward rebound in the USD/JPY pair on the back of stronger-than-expected US employment numbers late last week reached the resistance level of 145.98 before quickly falling back to the support level of 143.66 yesterday and stabilizing around the 144.45 level at the time of writing. According to the trading, the Bloomberg Dollar Spot Index also rose by 1% during the first four days of the year, pushing it to its biggest first-week gain since 2011, according to data compiled by Bloomberg.
Moreover, they fell for the second day in a row at the beginning of the week alongside US Treasury bond yields, which drifted higher after falling sharply during the last two months of 2023 amid growing speculation that the central bank will begin to ease monetary policy sharply this year. Thus, these bets face a major test with the release of the monthly consumer price index tomorrow, Thursday, and producer price data on Friday.
According to analysts, “The rates of US interest rate cuts are being reassessed by the Federal Reserve, and the market remains sensitive to hardening data surprises.” Added, “This may open the doors to a tactical recovery for the US dollar this week despite the continuation of the structural downward trend with the continued possibility of an interest rate cut in March.”
The trajectory of the U.S. dollar will largely depend on whether traders have overestimated the extent of the Federal Reserve's interest rate cuts this year. Currently, the futures market expects the U.S. central bank to cut its benchmark by around 1.5 percentage points in 2024, with the first move anticipated in March. Also, the data from the Commodity Futures Trading Commission released on Friday showed that non-commercial traders – a group that includes hedge funds, asset managers, other speculative players in the futures market – increased their bearish bets on the dollar to the highest level since late August.
In general, financial markets witnessed a slow start to this year after their ascent until the end of 2023. Recently, the S&P 500 index jumped for nine consecutive weeks to conclude the year, largely fuelled by increasing optimism that the U.S. economy would remain resilient, and the Federal Reserve would move to sharply lower interest rates through 2024. Moreover, some conflicting data has reinforced criticisms suggesting that Wall Street may have become overly optimistic about the number of upcoming interest rate cuts. Already, the Federal Reserve had raised the key interest rate to its highest level since 2001, hoping to cool down the economy and investment prices to control inflation. Significantly, with inflation lower than its peak, the Federal Reserve hinted that it might cut U.S. interest rates three times by 2024. This would give a boost to investment prices and alleviate pressure on the economy and the financial system.
USD/JPY Technical analysis and Expectations Today:
we expect the price of the US dollar against the Japanese yen to continue to perform in narrow ranges until the reaction to the announcement of the US inflation numbers. After that, investors will evaluate the future of the US central bank’s policy in the new year. Recently, speculation has increased about the imminent change in the policy of the Japanese central bank as well, but the occurrence The earthquake weakened those expectations. Therefore, I expect the upward trend to continue, and any decline in the currency pair may be an opportunity to buy again. Currently the closest support levels for USD/JPY are 143.20 and 142.00 respectively. On the other hand, breaking resistance 146.00 is a new strong incentive for bulls.
Ready to trade our Forex daily forecast? We’ve shortlisted the best forex broker list for you to check out.