However, the weaker yen has pushed import prices higher, dampening households’ purchasing power and curbing private consumption. The effects of higher import prices on private consumption have been a key concern for the BoJ and the Japanese government, leading to yen intervention warnings.
An upward revision to the October LEI would align with improving sentiment toward the Japanese economy and strengthen the yen. However, USD/JPY losses will likely be limited, considering the ongoing fiscal concerns and the BoJ’s cautious policy outlook and fading bets on a March Fed rate cut.
US Jobless Claims and Fed Rate Expectations
An unexpected surge in US GDP growth and a hotter-than-expected US price deflator tempered expectations of a March rate cut on Tuesday. A sharp increase in PCE prices signaled a sticky inflation outlook, while concerns mount about a decoupling of the labor market from GDP growth.
Later on Wednesday, initial jobless claims will come under scrutiny after last week’s weak US jobs report. Economists forecast initial jobless claims to slip from 224k (week ending December 13) to 223k (week ending December 20).
A lower claims reading would ease immediate concerns about the labor market, while supporting a more hawkish Fed policy stance. However, an unexpected spike in claims could revive Fed rate cut bets, supporting a bearish USD/JPY price outlook.
According to the CME FedWatch Tool, the chances of a March Fed rate cut dropped from 52.9% on December 22 to 45.1% on December 23. The sharp drop reflected the impact of the Q3 US GDP report on sentiment toward the Fed policy stance.
Yen Carry Trade Risks and Key Price Levels
While US data will influence US dollar demand and USD/JPY trends, risks of a yen carry trade unwind linger ahead of the holidays.
Elevated JGB and rising US Treasury yields will likely shift focus back to USD/JPY trends for early warning signs of an unwind. However, economists have mixed views on the USD/JPY’s breaking point. 10-year JGB yields could boost demand from domestic investors. The prospect of a stronger yen on repatriations and higher yields reinforces the constructive short- to medium-term bias.
A drop below 155 could be crucial for the negative short- to medium-term bias, given Tuesday’s low of 155.649.
Technical Outlook: USD/JPY on a Downward Trajectory
With markets monitoring technical indicators and fundamentals, they will offer crucial signals into potential USD/JPY price trends.
Looking at the daily chart, USD/JPY remained above the 50-day and 200-day Exponential Moving Averages (EMAs), indicating a bullish bias. While technicals remained bullish, fundamentals are increasingly outweighing the technical structure, indicating a bearish outlook.
A drop below the 155 support level would bring the 50-day EMA into play. If breached, 150 would be the next key support level. Importantly, a sustained break below the 50-day EMA would signal a bearish near-term trend reversal, paving the way to the 200-day EMA and 150. A break below the 200-day EMA would reinforce the bearish medium- to longer-term USD/JPY price outlook.
AloJapan.com