USD/JPY Weighed Under its Death Cross

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USD/JPY Analysis

The pair registered an eye-watering rally for most of the previous year as the Bank of Japan maintained an ultra-loose setting while its US counterpart went through its most aggressive tightening cycle in decades.

However, the Federal Reserve went back to a 50 basis point rate hike in December, and markets don’t believe they will raise it by as much as forecasts suggest. This works against the USDollar and the pair runs its third straight losing month. CME’s Fed Watch Tool touts another slowdown in the pace of tightening, with a smaller 0.25% increase next week and we haven’t seen any meaningful pushback against this expectation from Fed officials.

Meanwhile, the Bank of Japan surprised markets last month with aggressive tweaks in its yield curve management, doubling the target range to 0.5% for 10-year bond yields. This opens the door for policy normalization, but an imminent and straightforward shift does not seem very likely. The central bank disappointed some market participants last week as it chose not to change the yield curve any further.

This helped USD/JPY to a two-day lead and a strong start to the week, which could allow the greenback to look into the critical 132.40-133.05 region, which contains the EMA200 and the 23.6% Fibonacci from the 2022 high/2023 low slump. While a strong catalyst would be needed to challenge this level, turning it off could accelerate a recovery to 133.67.

On the other hand, the recovery from last week’s lows looks frivolous and a glance at the daily chart doesn’t leave much room for optimism as the DMA50 has moved below the sluggish DMA200. This Death Cross formation is often seen as a precursor to further weakness, but more time is needed to gauge its potential. In any case, the risk is clearly on the downside and USD/JPY vulnerable to lower lows (127.21).

The couple’s trajectory could be affected by the incoming data from the US in the coming days. These include the PCE inflation update, which Fed officials will take into account ahead of next week’s policy decision.

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