The USD/JPY pair saw a strong bullish push last week, reaching a six-month high near 158.88. This upward momentum was fueled by continued uncertainty surrounding the timing of a potential interest rate hike by the Bank of Japan. Despite statements from Japanese Economy Minister Ryusei Akazawa highlighting the economy’s “critical stage” in overcoming deflation, no clear timeline for a rate increase was offered.
While the pair did experience some profit-taking, briefly dipping to 157.22, it stabilized around 157.70 by the end of the session. This dip occurred despite surprisingly strong US jobs data. Japanese household spending contracted by 0.4% year-on-year in November, while income saw a modest 0.7% increase. Further pressuring the yen, the widening yield gap between US and Japanese bonds continues to favor the dollar, driven by hawkish signals from the US Federal Reserve.
US Economic Data Supports a Cautious Fed
The latest US jobs report revealed a robust addition of 256,000 jobs in December, exceeding the 212,000 added in November. The unemployment rate also fell to 4.1% from a previously anticipated 4.2%. These figures indicate that the US economy and employment have shown resilience despite higher interest rates. This strong performance makes it less likely that the Federal Reserve will aggressively cut interest rates in the near term.
The Fed’s previous rate cuts were partly motivated by concerns about slowing growth and employment. However, these strong job numbers suggest the US economy is entering a phase of moderate growth, higher rates, low unemployment, and slightly elevated inflation.
Trading Outlook and Expectations
Despite the recent sell-off, which appears to be a normal correction after gains, the underlying bullish factors for USD/JPY remain strong. The psychological resistance level of 160.00 is still firmly within reach.
US Rate Cut Expectations Reduced: The stronger economic data has led to expectations that the Federal Reserve may pause further rate cuts. Additionally, concerns about potential inflationary pressure from Trump’s trade policies are adding to the cautious approach. The Fed’s December projections showed only two rate cuts by 2025, reflecting a slowdown in progress towards their 2% inflation target. This week’s US consumer and wholesale price reports will offer more clues on inflation trends ahead of the Fed’s January policy meeting.
Technical Analysis and Levels
- Short-Term: USD/JPY is currently trading slightly below its 100-hour moving average. The Relative Strength Index (RSI) suggests there is room for further movement before reaching oversold territory. Bears will aim to push the price down towards 157.48 and potentially 156.90. Conversely, bulls will look for rebounds toward the 158.00 and 158.65 resistance levels.
- Long-Term: On the daily chart, USD/JPY is trading within an ascending channel, and the 14-day RSI supports a bullish bias. Bulls will likely target the 160.00 resistance and possibly even 162.60. A move to 162.60 would push technical indicators into overbought territory. Bears, in the long term, might try to profit from pullbacks towards the 155.00 or even the 152.30 support levels.
Key Takeaway: While there may be short-term fluctuations, the overall trend for USD/JPY remains bullish, with the 160.00 level as the primary focus.
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