USD/JPY Eyes 158.60 as Yen Weakness Offsets Fed Cuts, Charts Tighten
USD/JPY is heading into the new year on solid ground, having traded just below 157.00 for four sessions straight.
Quick overview
- USD/JPY remains strong, trading just below 157.00, primarily due to the Japanese yen's ongoing weakness.
- The Bank of Japan's cautious approach to tightening has widened the yield gap between the US and Japan, favoring the dollar.
- US Federal Reserve's anticipated interest rate cuts are limiting support for the dollar, while upcoming Nonfarm Payrolls data could impact USD/JPY's direction.
- Technically, USD/JPY is in a rising channel, with key resistance at 157.70 and support at 156.30.
USD/JPY is heading into the new year on solid ground, having traded just below 157.00 for four sessions straight. Not that it’s been a case of the US dollar stepping up, but rather the Japanese yen continues to struggle. And this isn’t just because markets are suddenly all in on US interest rate cuts later this year… though that is still in the mix. More to the point, the Bank of Japan’s cautious approach to tightening keeps the gap between US and Japanese yields wide enough to keep the pair going in the US dollar’s favour.
The net result is a situation where USD/JPY stays high, not because of a broad rush to buy dollars, but because the yen lacks a clear driver to push it back up.
The BoJ Policy is Keeping the Yen on its Knees
The BoJ raised interest rates in December to 0.75%, but this was meant to be a major step toward returning to normal – in reality, though, it’s left investors feeling in the dark about the plan. The whole thing has left the yen looking weak, especially when you compare it to other central banks in major economies that are clearly steering in the same direction.
Lately, the Japanese government has been trying to let people know it’s keeping a close eye on the currency markets. Finance Minister Satsuki Katayama has had a few words to say on the topic, and that may yet slow down the yen’s slide – but so far it’s not had any lasting impact on the trend.
Focus Shifts to US – Fed Outlook and NFP Data in the Spotlight
Over in the US, meanwhile, expectations are that the Federal Reserve will cut interest rates twice this year, which is keeping the dollar from getting much support. Although the Fed has been trying to get its message out on the future direction of rates, so far, the market is more convinced by the other way around.
It’s getting messy with some of the people who will shape the Fed’s next move in the hot seat. The US Nonfarm Payrolls report is just what the doctor ordered – a soft labour market print might actually get the rate cut predictions back on the table – and this could put USD/JPY to the test. On the other hand, stronger data makes the pair much more robust and keeps it higher.
Technical Setup Suggests We’re Getting Close to a Big Decision
From a purely technical point of view, USD/JPY is touching 156.87 on a 4-hour chart – in other words, it’s still inside a rising channel which has controlled the ups and downs since the first of December. But we can also see the price rising with higher lows. And so what we have is an ascending trend line that’s keeping the price supported around 156.30.
More recent candlesticks have shown a couple of small candles with little action above 157.00, so that’s not a sign of anything other than the price consolidating. Price is also coilling below a descending resistance line at 157.70 ,which looks a lot like a tightening structure – rather like a rising wedge.
There are a few key levels to keep an eye on:
- Resistance levels: we’ve got 157.70, then 158.60 and 159.25 – these are going to be the first tests.
- Support levels: we’ve got 156.30, and then 155.55 – which is 38.2% of the Fibonacci retracement – that provides a more general idea of where the price came from.
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