■ The Japanese Yen drifts lower against the USD on Wednesday, albeit lacks follow-through.
■ Diminishing odds for a BoJ policy pivot, along with the risk-on mood, undermines the JPY.
■ Subdued USD price action caps the upside for USD/JPY ahead of the key FOMC decision.
The Japanese Yen (JPY) remains on the defensive against its American counterpart heading into the European session on Wednesday and is undermined by diminishing odds for an imminent shift in the Bank of Japan's (BoJ) policy stance. In fact, reports indicate that BoJ policymakers see little need to end negative rates in December. This, along with the latest optimism led by hopes for further policy support and additional stimulus from China, turn out to be key factors undermining the JPY.
The USD/JPY pair, however, struggles to capitalize on the previous day's goodish rebound of around 75 pips that followed the release of a sticky US inflation report and oscillates in a range amid subdued US Dollar (USD) price action. The uncertainty over the Federal Reserve's (Fed) near-term policy outlook is holding back the USD bulls from placing fresh bets and acting as a headwind for the major. Furthermore, investors opt to wait on the sidelines ahead of the crucial FOMC policy decision.
The US central bank is widely anticipated to leave interest rates unchanged, though the updated economic projections and Fed Chair Jerome Powell's comments at the post-meeting press conference should provide cues about the future rate path. The outlook, in turn, will play a key role in influencing the USD price dynamics and provide some meaningful impetus to the USD/JPY pair. The market focus will then shift to the highly-anticipated BoJ monetary policy meeting next week.
Daily Digest Market Movers: Japanese Yen oscillates in a range as traders await FOMC decision
The US Labor Department reported on Tuesday that the headline Consumer Price Index (CPI) edged up 0.1% in November and the yearly rate ticked down to 3.1% from the 3.2% previous.
The annual Core CPI inflation, which excludes volatile food and energy prices, held steady at 4.0% as forecast and rose 0.1% on a monthly basis, little changed as compared to the previous month.
The November numbers were still well above the Federal Reserve's 2% target, which, along with Friday's stronger US jobs data, forced investors to further scale back bets for a March rate cut.
This allowed the US Dollar to pare the overnight losses and helped the USD/JPY pair to attract some dip-buying near the 144.70 area, though the momentum lacked any follow-through.
Traders have been trimming their bets for a stronger Japanese Yen after reports indicated that the Bank of Japan policymakers see little need to end negative rates in December.
Adding to this, the prevalent risk-on environment is seen undermining the JPY's safe-haven status and assists the USD/JPY pair to gain some follow-through traction on Wednesday.
The Tankan survey showed that Business confidence at big Japanese manufacturers improved more than expected in the fourth quarter, albeit doing little to impress the JPY bulls.
Reporting on the annual Central Economic Work Conference that ended on Tuesday, state media said that China will step up policy adjustments to support an economic recovery in 2024.
A senior Communist Party official said on Wednesday that China should set its 2024 fiscal deficit and special local government bonds at appropriate levels and optimise the structure of fiscal spending.
Hope for additional stimulus from China further boosts investors' sentiment and largely overshadows the risk of a further escalation of geopolitical tensions in the Middle East.
Yemen's Iran-backed Houthi rebels issue regulations for navigating through the Red Sea amid Israel embargo and the warning includes a restriction on travel towards "Occupied Palestinian territories".
The US on Tuesday imposed new sanctions on more than 250 individuals and entities in an effort to crack down on Russia’s evasion of sanctions imposes after its invasion on Ukraine.
The focus remains glued to the key FOMC decision, which will be accompanied by updated economic projections and followed by Federal Reserve Chair Jerome Powell's presser.
Investors will look for fresh cues about the timing of when the US central bank may begin cutting rates in 2024 amid signs of easing inflation and the still resilience US economy.
Technical Analysis: USD/JPY lacks bullish conviction, 200-hour SMA holds the key for bulls
From a technical perspective, the USD/JPY pair on Tuesday found decent support near the 38.2% Fibonacci retracement level of the recent solid rebound from a multi-month low touched last week. The lack of any strong follow-through buying, along with the fact that oscillators on the daily chart are holding deep in the negative territory, warrants some caution for bullish traders. Hence, any subsequent move up is likely to confront resistance near the 146.00 round-figure mark. This is closely followed by the 200-hour Simple Moving Average (SMA), currently around the 146.25 region, which if cleared decisively could set the stage for additional gains.
On the flip side, weakness below the 145.00 psychological mark might continue to attract some buyers near the 144.70 area, or the 38.2% Fibo. level. A convincing break below will be seen as a fresh trigger for bearish traders and drag the USD/JPY pair further towards the 50% Fibo. support near the 144.00 round figure, en route to the 143.55-143.50 region (61.8% Fibo.). Spot prices could eventually weaken below the 143.00 mark and aim to test the next relevant support near mid-142.00s.