Increased USD/JPY Trading Ahead of BoJ Decision and Surging US Yields

• In Monday’s session, the USD/JPY pair is making notable strides upward, trading around the 143.00 level. A surge in US yields has largely propelled the pair and a risk-on environment, shifting demand away from the safe-haven JPY. Ahead of the Bank of Japan’s (BoJ) decision on Tuesday, the Japanese currency has a chance to outperform the Greenback on monetary policy divergences in case the BoJ gives a hawkish surprise.
• On the US side, the Federal Reserve (Fed) maintained rates of 5.25%-5.50% in its December meeting and provided largely dovish guidance; inflation was recognized to be softening, prompting the Fed to consider ease in policy sooner than originally planned. The prospect of rate cuts could begin as early as May if core inflation trends positively. This dovish stance in the Fed’s policy significantly weakened the US Dollar, which faced severe selling pressure last week.
• Meanwhile, US Treasury yields are edging higher. The 2-year rate is 4.45%, while the 5-year and 10-year rates rose to 3.95% each, which favored the US Dollar.
• On the JPY side, political scandals in Japan could hasten the Bank of Japan’s (BoJ) timeline to end the Negative Interest Rate Policy (NIRP). This potential early exit from NIRP, likely before April, could bring volatility to the USD/JPY. Following this, two 10bps hikes are expected from the BoJ in 2024, but global economic trends could make this ‘one and done’. In line with that, markets will closely look at the bank’s stance and approach on Tuesday to get further clues on its next movements to place their bets and positions.

USD/JPY levels to watch

On the daily chart, indicators demonstrate a dominant selling momentum in the short-term perspective. The Relative Strength Index (RSI) poised in negative territory, reveals continued selling pressure but is now on a positive slope, suggesting that the selling traction is slowing down, likely attributed to bears taking a breather following a nearly 2% losing week.

Moving onto the Moving Average Convergence Divergence (MACD), it lays out flat red bars, indicating a lack of momentum from the sellers. Despite the recently printed bearish MACD histogram, the flatness hints at a potential pause in the market’s downturn, further aligning with the RSI’s sentiment of bears taking a quick respite.

Turning to the Simple Moving Averages (SMAs), the pair is wedged between levels, trading below the 20 and 100-day SMAs yet sustaining above the significant 200-day threshold. This configuration hints at a stronger selling force in the shorter timeframe, but the pair’s survival above the 200-day SMA implies the long-term bullish sentiment hasn’t faded completely..

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