Japanese Yen rallies to near two-month top against USD amid hawkish BoJ expectations

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• The Japanese Yen strengthens against the USD for the third straight day on Thursday.

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• The divergent BoJ-Fed policy expectations continue to underpin the lower-yielding JPY. 

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• A positive risk tone does little to dent bullish sentiment surrounding the safe-haven JPY.

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The Japanese Yen (JPY) remains on the front foot against its American counterpart during the Asian session on Thursday amid the growing acceptance that the Bank of Japan (BoJ) would keep raising interest rates. The bets were reaffirmed by better-than-expected Japanese wage data on Wednesday. In contrast, the Federal Reserve (Fed) is expected to lower borrowing costs further by the end of this year. This would result in the narrowing of the rate differential between Japan and the US, which turns out to be another factor driving flows toward the lower-yielding JPY.

Meanwhile, the prospects for further policy easing by the Fed, along with the recent decline in the US Treasury bond yields, keep the US Dollar (USD) depressed near its lowest level in over a week. This, in turn, is seen exerting downward pressure on the USD/JPY pair for the third successive day and drags spot prices to the 151.80 area, or the lowest level since December 12. It, however, remains to be seen if the JPY bulls can retain control amid worries that Japan would also be an eventual target for US President Donald Trump's trade tariffs and the risk-on mood. 

Japanese Yen continues to gain positive traction amid rising BoJ rate hike bets

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• Data released on Wednesday showed a rise in Japan's real wages, which reaffirms bets that the Bank of Japan will raise interest rates again and continues to underpin the Japanese Yen.

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• Japan's Finance Minister, Katsunobu Kato, said on Thursday that he sees inflationary conditions as prices continue to rise further, though the end of deflation has not yet been achieved.

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• Separately, BoJ Board Member, Tamura Naoki, backed faster interest rate hikes and said that the central bank must raise rates at least to around 1% in the latter half of fiscal 2025.

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• According to LSEG, market participants are currently pricing around a 94.8% chance for a quarter-point hike by the BoJ at its September monetary policy meeting.

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• In contrast, the markets are pricing in the possibility that the Federal Reserve will cut interest rates twice by the end of this year amid signs of a slowdown in the US job market.

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• The Job Openings and Labor Turnover Survey (JOLTS) showed on Tuesday that the number of job openings fell from 8.09 million in the previous month to 7.6 million in December. 

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• Moreover, the Institute of Supply Management (ISM) reported that the economic activity in the US service sector continued to expand in January, albeit at a softer pace than in December.

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• The US ISM Services PMI declined from 54.0 to 52.8 in January and the Prices Paid Index dropped to 60.4 from 64.4, while the Employment Index edged higher to 52.3 from 51.3.

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• The softer services activity data dragged the US Treasury bond yields lower, which undermined the US Dollar and exerted heavy downward pressure on the USD/JPY pair. 

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• The USD failed to gain respite from the Automatic Data Processing (ADP) report, which showed that the private sector added 183K in January compared to 176K in the previous month.

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• Fed Vice Chair Philip Jefferson said on Thursday that he is happy to keep the Fed Funds on hold at the current level and that he will wait to see the net effect of Trump's policies.

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• Thursday's US economic docket features the release of Challenger Job Cuts and the usual Weekly Initial Jobless Claims data, which might provide some impetus to the Greenback.

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• The market focus, however, will remain glued to the closely-watched US monthly employment details – popularly known as Nonfarm Payrolls (NFP) report due on Friday.

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USD/JPY seems vulnerable after the overnight breakdown below the 152.50 confluence

From a technical perspective, the overnight breakdown and close below the 152.50-152.45 confluence – comprising the 100- and the 200-day Simple Moving Averages (SMAs) was seen as a fresh trigger for bearish traders. A subsequent fall below the 152.00 mark validates the negative outlook and suggests that the path of least resistance for the USD/JPY pair remains to the downside. Given that oscillators on the daily chart are still away from being in the oversold zone, spot prices could slide further toward the 151.50 intermediate support en route to the 151.00 mark and the 150.60 horizontal support.

On the flip side, an attempted recovery might now confront stiff resistance and remain capped near the 152.50 confluence support breakpoint. A sustained strength beyond, however, might trigger a short-covering rally and lift the USD/JPY pair beyond the 153.00 mark, toward testing the next relevant hurdle near the 153.70-153.80 region. This is closely followed by the 154.00 round figure, which if cleared might negate the negative outlook and shift the near-term bias in favor of bullish traders.