• On Monday, the Japanese Yen relinquishes its modest intraday gains against the USD, reaching a level not seen in nearly three months.
  • An increase in US bond yields stimulates demand for the USD and aids the USD/JPY in recovering from a multi-week low.
  • In conjunction with dovish Fed expectations, the cautious market sentiment should stifle any significant upside for the major.

On Monday, the Japanese Yen (JPY) strengthened against the US Dollar (USD) to its greatest level since September 11. However, it encountered challenges in utilizing this intraday strength. The Bank of Japan (BoJ) policymakers downplayed rumors last week regarding an exit from the accommodative regime of ten years and the cessation of negative interest rates, which is considered a significant factor undermining the JPY. However, the USD/JPY pair manages to recover more than 65 basis points from the daily low due to the emergence of USD purchasing prompted by an increase in US Treasury bond yields.

In contrast, spot prices continue to hover below the 147.00 level as trading approaches Europe in the midst of a worldwide flight to safety, an environment that generally favors the JPY. The recent ascent observed in the worldwide equity markets encounters a halt due to the geopolitical risk emanating from the Middle East. This is in addition to concerns regarding the possibility of another respiratory illness outbreak similar to COVID-19 and the deteriorating economic situation in China. As a result, investors are less inclined to invest in speculative assets and traditional safe-haven assets, such as the JPY, are perceived to receive some support.

Moreover, the USD’s meaningful ascent is impeded by the increasing consensus that the Federal Reserve (Fed) has concluded its rate-hiking campaign and could potentially begin alleviating monetary policy in the first half of 2024. As a result, prior to concluding that the USD/JPY pair has established a near-term bottom and preparing for a significant recovery, some caution is warranted. Traders are currently awaiting the release of US Factory Orders data as a source of motivation prior to the Tokyo core CPI on Tuesday and other significant US macro data that are expected to be released this week.

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USD/JPY Technical Analysis: No significant purchasing activity is observed, and upside potential appears to be constrained.

The recent failure in advance of the 152.00 level on the daily chart represented the development of a bearish double-top pattern, as viewed from a technical standpoint. The subsequent Friday breach and close below the 100-day simple moving average (SMA) provides additional support for the USD/JPY pair’s near-term pessimistic outlook. In contrast, spot prices encounter some assistance in the vicinity of 146.20, which signifies the 38.2% Fibonacci retracement level of the surge from July to October and is anticipated to function as a critical juncture. Considering the daily chart oscillators that are firmly established in negative territory, follow-through selling could propel the pair to the 145.45-145.40 intermediate support level, which is en route to the 145.00 psychological mark and the 50% Fibo level, which is located in the mid-144.00s.

Conversely, any endeavour to recover may presently encounter formidable opposition and encounter a new supply near the 147.00 level. Consequently, the USD/JPY pair should be capped near the 100-day SMA support breakpoint, which is presently located between 147.30 and 147.35. However, continued strength beyond that level might incite a rally of short-covering and enable spot prices to reclaim the round number of 148.00. The momentum may continue to build in the vicinity of 148.25 to 148.30.

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