Japanese Yen trims part of its weekly losses against USD; upside potential seems limited

• The Japanese Yen benefits from a modest USD downtick, though the upside seems limited.

• The uncertainty around a December BoJ rate hike and the risk-on mood might cap the JPY. 

• Bets for a less dovish Fed could underpin the USD and offer support to the USD/JPY pair.

The Japanese Yen (JPY) gains some positive traction during the Asian session on Thursday, with the USD/JPY pair snapping a three-day winning streak to a two-week high touched the previous day. The JPY seems to draw some support from a modest US Dollar (USD) weakness, led by firming expectations that the Federal Reserve (Fed) will cut interest rates next week. Apart from this, the intraday JPY strength lacks any obvious fundamental catalyst and is more likely to be limited amid fading hopes for another interest rate hike by the Bank of Japan (BoJ) in December. 

Moreover, the recent goodish rebound in the US Treasury bond yields and the prevalent risk-on environment should contribute to capping the safe-haven JPY. That said, the JPY bears might refrain from placing aggressive bets and opt to wait for the BoJ's final policy meeting of the year next week. This, along with geopolitical risks and the uncertainty surrounding US President-elect Donald Trump's policies, could offer some support to the safe-haven JPY. Meanwhile, the mixed fundamental backdrop warrants caution before confirming that the USD/JPY pair has topped out.

Japanese Yen might struggle to attract any meaningful buying amid fading hopes for a December BoJ rate hike

A Bloomberg report on Wednesday said that the Bank of Japan (BoJ) sees little cost to wait before raising interest rates again, though officials are still open to a hike next week depending on data and market developments.

Moreover, mixed signals from BoJ officials suggest that the central bank is in no hurry to tighten its policy, dragging the Japanese Yen to a two-week trough against its American counterpart on Wednesday. 

Meanwhile, Japan's economy is expanding moderately, while wages are rising steadily and inflation remains above BoJ's 2% target. This indicates that conditions for another interest rate hike are falling in place. 

Traders, however, might refrain from placing aggressive directional bets around the Japanese Yen ahead of the BoJ decision next week, just hours after that of the Federal Reserve's expected interest rate cut.

The US Bureau of Labor Statistics (BLS) reported on Wednesday that the headline Consumer Price Index rose 0.3% in November, marking the largest gain since April, and the yearly rate accelerated to 2.7%.

Meanwhile, the core CPI, which excludes volatile food and energy prices, increased 0.3% during the reported month and was at 3.3% in the 12 months through November, in line with market expectations.

According to the CME Group's FedWatch Tool, the Federal Reserve is still expected to deliver a third consecutive rate cut at the end of December meeting next week on the back of signs of a cooling labor market. 

Meanwhile, the US CPI report indicated that the progress in lowering inflation toward the Fed's 2% target has stalled, which might force the Fed to adopt a more cautious stance on cutting interest rates going forward. 

The markets are already anticipating that the Fed may hit the pause button as early as the January meeting amid the growing uncertainty surrounding US President-elect Donald Trump's policies and impending tariff plans. 

This, in turn, lifts the yield on the benchmark 10-year US government bond to a two-week high on Thursday, which acts as a tailwind for the US Dollar and should continue to offer some support to the USD/JPY pair. 

Thursday's US economic docket features the release of the US Producer Price Index and the usual Weekly Initial Jobless Claims data, which might provide some impetus later during the North American session.

USD/JPY needs to strengthen beyond the 152.70-152.80 confluence for bulls to retain control in the near term

From a technical perspective, the overnight breakout through the 200-day Simple Moving Average (SMA), around the 152.00 mark, was seen as a fresh trigger for bullish traders. Moreover, oscillators on the daily chart are holding comfortably in the positive territory and are still away from being in the overbought zone, suggesting that the path of least resistance for the USD/JPY pair remains to the upside. 

The subsequent move up, however, stalls near the 152.70-152.80 confluence, comprising the 200-period SMA on the 4-hour chart and the 50% retracement level of the recent pullback from the multi-month high. The said area might continue to act as an immediate hurdle, above which the USD/JPY pair could surpass the 153.00 mark and aim to test the next relevant hurdle near the 153.65 region, or the 61.8% Fibonacci retracement level. 

On the flip side, weakness below the 152.00 mark might now find some support near the 151.75 area, or the 38.2% Fibo. level. Any further slide might continue to attract fresh buyers and remain limited near the 151.00 round figure. The latter should act as a key pivotal point, below which the USD/JPY pair could slide to the 150.50 intermediate support before eventually dropping to the 150.00 psychological mark.