The Japanese Yen's recent gains have been tempered by growing fiscal concerns and the upcoming Bank of Japan (BoJ) meeting, which has become the primary focus for market participants. While the Yen has shown resilience against the US Dollar, traders are hesitant due to mixed fundamental signals. The expectation of intervention by Japanese authorities to counter currency weakness provides a tailwind for the Yen. Additionally, the prospect of further policy tightening by the BoJ and the prevailing risk-off sentiment have lent support to the safe-haven Yen.
However, the Yen's upward momentum has been limited as traders await the outcome of the two-day BoJ meeting on Friday. This meeting is expected to provide more clarity on the timing of the next rate hike. Meanwhile, this week's decline in Japanese government bonds (JGBs), driven by concerns over Japan's fiscal health and Prime Minister Sanae Takaichi's expansionary policies, has capped the Yen's gains. This warrants caution for those considering bullish bets on the USD/JPY pair.
The Japanese Yen is struggling to attract buyers as fiscal concerns outweigh supportive factors. Last week, Japan's Finance Minister Satsuki Katayama hinted at the possibility of joint intervention with the US to address the Yen's weakness. This, coupled with hawkish BoJ expectations and sustained safe-haven demand, helped the Yen gain some traction during the Asian session on Wednesday.
A recent BoJ survey for December revealed that most Japanese households anticipate prices to continue rising over the next few years. This adds to data released last Friday, showing that Japan's inflation has averaged above the BoJ's 2% target for four consecutive years, strengthening the case for further policy tightening.
Reuters reported last week, citing sources, that some BoJ policymakers see scope for an earlier-than-expected rate hike, with April being a distinct possibility. The sliding Yen poses a risk of exacerbating already rising inflationary pressures. Additionally, concerns over Japan's deteriorating finances led to a sharp increase in Japanese government bond yields.
On Monday, Prime Minister Sanae Takaichi announced plans for a snap election in February. With Takaichi's popularity riding high, a strong majority for the ruling Liberal Democratic Party (LDP) in the lower house could grant her more freedom to pursue her agenda and increase the likelihood of post-election spending and tax cuts.
Investors have expressed skepticism towards Takaichi's fiscal policies, pushing the yield on the 40-year JGB to a new high since its debut in 2007. A decline in demand at the 20-year debt auction further exacerbated the situation, sending yields into uncharted territory amid a broader sell-off in government bonds. This could limit further gains for the Yen.
The US Dollar, on the other hand, is struggling to build on its overnight bounce from a two-week low and remains under selling pressure for the third consecutive day. Renewed trade war fears have revived the 'Sell America' trade, weighing on the USD/JPY pair. Traders appear reluctant ahead of the two-day BoJ meeting.
After raising the overnight interest rate to 0.75% last month, the highest in 30 years, the BoJ is expected to maintain the status quo on Friday. Attention will be focused on BoJ Governor Kazuo Ueda's comments during the post-decision press conference, where traders will seek clues about the timing of the next rate hike.
Heading into this critical central bank event, traders will also be watching the release of the US Personal Consumption Expenditure (PCE) Price Index on Thursday. This will be accompanied by the final US Q3 GDP growth report, providing insights into the US Federal Reserve's rate-cut path, which will drive the USD and influence the USD/JPY pair.
Bears are in control of the USD/JPY pair while it trades below the 100-hour Simple Moving Average (SMA). The 100-period SMA is sloping downwards at 158.17, with the USD/JPY pair holding beneath it, maintaining a bearish intraday bias. A recovery above this SMA would alleviate downside pressure. The Moving Average Convergence Divergence (MACD) and its Signal line are clustered around the zero mark, indicating limited momentum, while the Relative Strength Index (RSI) sits at 48 (neutral), offering little directional guidance.
Measured from the 159.46 high to the 157.41 low, the 38.2% Fibonacci retracement at 158.19 and the 50% retracement level at 158.43 are capping initial rebounds. While the price trades below the 100 SMA, sellers retain the near-term advantage, and rallies would be limited by nearby resistance overhead. A decisive push above the average could open a path towards the next retracement barrier, but failure to reclaim it would maintain pressure on the one-hour tone. The MACD needs to hold above zero to strengthen an upside reversal, and a turn back into negative territory would reinforce a sluggish backdrop. An RSI edging towards 50 would help stabilize, but a drop back through the mid-40s would leave the bias soft.
(The technical analysis of this story was generated with the assistance of an AI tool.)
When it comes to risk sentiment, the terms "risk-on" and "risk-off" are commonly used in financial markets to describe the level of risk investors are willing to take. In a "risk-on" market, investors are optimistic and more inclined to buy riskier assets. Conversely, in a "risk-off" market, investors adopt a more cautious approach, favoring less risky assets that offer more certainty, even if the returns are modest.
During "risk-on" periods, stock markets typically rise, and most commodities, except Gold, also gain value due to a positive growth outlook. The currencies of commodity-exporting nations strengthen as demand increases. Cryptocurrencies also tend to rise. In a "risk-off" market, Bonds, especially major government Bonds, appreciate in value, Gold shines, and safe-haven currencies like the Japanese Yen, Swiss Franc, and US Dollar benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), and minor currencies like the Ruble (RUB) and South African Rand (ZAR) tend to rise in "risk-on" markets. This is because these currencies' economies heavily rely on commodity exports for growth, and commodities tend to increase in price during risk-on periods due to anticipated higher demand from increased economic activity.
The major currencies that tend to rise during "risk-off" periods are the US Dollar (USD), Japanese Yen (JPY), and Swiss Franc (CHF). The US Dollar's status as the world's reserve currency and the demand for US government debt during times of crisis contribute to its strength. The Yen benefits from increased demand for Japanese government bonds, as a significant portion is held by domestic investors who are unlikely to sell, even in a crisis. The Swiss Franc's strict banking laws offer enhanced capital protection for investors.
