03 Dec 2024

The Japanese Yen experienced some selling pressure on Tuesday; however, the potential for further decline appears constrained.

Increasing expectations for an additional rate increase by the Bank of Japan in December are likely to support the JPY.

Additionally, geopolitical uncertainties, threats of tariffs from Trump, and subdued US bond yields are advantageous for JPY proponents.

The Japanese Yen (JPY) continues to exhibit weakness as the European trading session approaches on Tuesday. This, combined with a slight strengthening of the US Dollar (USD), enables the USD/JPY pair to maintain its modest gains near the significant 150.00 level. Nevertheless, the potential for further depreciation of the JPY appears constrained due to speculation surrounding a possible interest rate increase by the Bank of Japan (BoJ) in December. Additionally, apprehensions regarding US President-elect Donald Trump's tariff strategies, ongoing geopolitical tensions, and the recent drop in US Treasury bond yields are likely to support the lower-yielding JPY.

Conversely, the USD appears to be facing challenges in sustaining the rebound from a nearly three-week low, which may further limit the upside potential for the USD/JPY pair. Market participants may opt to adopt a cautious stance, awaiting additional insights regarding the Federal Reserve's (Fed) approach to interest rate cuts before making new directional investments. Consequently, attention remains focused on critical US economic indicators, including the Nonfarm Payrolls (NFP) report scheduled for release on Friday. Furthermore, remarks from Fed Chair Jerome Powell will be closely monitored for indications regarding the interest rate trajectory in the US, which could provide significant market direction.

Japanese Yen bears appear to lack commitment regarding hawkish expectations from the Bank of Japan, amid concerns over trade wars and geopolitical tensions. The Consumer Price Index (CPI) for Tokyo, released last week, indicated that underlying inflation is gaining traction, thereby increasing the likelihood of a rate hike by the Bank of Japan in December.

Bank of Japan Governor Kazuo Ueda stated on Saturday that the central bank is prepared to adjust its monetary easing measures at the appropriate time, should it gain confidence that underlying inflation is moving towards the 2% target.

In a separate development, Russia has launched at least 60 missiles from North Korea towards Ukraine, with North Korean leader Kim Jong Un pledging unwavering support for Moscow until it secures a significant victory in Ukraine.

US President-elect Donald Trump has committed to imposing substantial tariffs on America’s three largest trading partners and 'BRICS' nations, heightening the risk of a renewed global trade conflict. Trump reiterated on Monday his opposition to Nippon Steel's proposed $15 billion acquisition of US Steel, asserting that he will prevent the transaction from proceeding.

Investor apprehension persists regarding Trump's tariff strategies and expansionary policies, which could potentially reignite inflationary pressures, compelling the Federal Reserve to halt its rate cuts or even consider raising rates.

The Institute of Supply Management's (ISM) Manufacturing Purchasing Managers Index (PMI) increased to 48.4 in November, fueled by optimism surrounding business-friendly policies anticipated from the Trump administration.

According to the CME Group's FedWatch Tool, traders are currently estimating a nearly 75% probability that the US central bank will reduce borrowing costs by an additional 25 basis points later this month.

The yield on the benchmark 10-year US Treasury bond has declined to its lowest levels since late October, which has narrowed the yield differential between the US and Japan, potentially benefiting the lower-yielding Japanese Yen.

Investors are closely monitoring significant US macroeconomic releases scheduled for the beginning of the new month, as these will provide further insights into the Federal Reserve's future rate-cut trajectory, influencing both the US dollar and the USD/JPY exchange rate.

USD/JPY faces challenges in extending its gains past the significant 150.00 psychological level, indicating that the potential for further upward movement appears constrained.

From a technical standpoint, the decline observed last week beneath the 38.2% Fibonacci retracement level of the September-November rally may serve as a new catalyst for bearish traders. Additionally, the oscillators on the daily chart remain significantly entrenched in negative territory and are still distant from the oversold zone, indicating that the most likely direction for the USD/JPY pair continues to be downward. However, a slight rebound from the support of the 100-day Simple Moving Average (SMA), currently situated around the 149.00 level, necessitates caution before committing to further losses. A decisive breach below this level could lead to a decline towards the 50% retracement level, approximately in the 148.20 area, on the way to the 148.00 mark. Continued selling pressure may reveal the 61.8% Fibonacci level, around the 147.00 round figure, with some interim support located near the 147.35 region.

Conversely, any further strength surpassing the psychological threshold of 150.00 is likely to encounter significant resistance near the recent swing high, around the 150.75 area, just ahead of the 151.00 round figure. A sustained move beyond this point could initiate a short-covering rally, propelling the USD/JPY pair towards the 151.65 region, en route to the 152.00 mark. This latter level corresponds to the crucial 200-day Simple Moving Average (SMA) and is expected to serve as a key pivot point; if decisively breached, it would indicate that the recent corrective pullback from a multi-month peak has concluded. Consequently, this would realign the near-term outlook in favor of bullish traders.