Japanese Yen remains on the back foot amid a positive risk tone; downside seems limited

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• The Japanese Yen attracts sellers for the second straight day due to a positive risk tone.

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• Bets for more interest rate hikes by the BoJ should help limit deeper losses for the JPY.

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• The divergent BoJ-Fed expectations should contribute to capping gains for USD/JPY.

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The Japanese Yen (JPY) struggles to capitalize on a modest Asian session uptick and turns lower for the second consecutive day against its American counterpart on Wednesday. The optimism over a delay in the implementation of Trump's reciprocal tariffs and talks aimed at ending the Russia-Ukraine war remains supportive of a positive tone around the equity markets. This, in turn, is seen as a key factor undermining the safe-haven JPY, which, along with a modest US Dollar (USD) uptick, assists the USD/JPY pair to rebound around 40 pips from the daily low. 

Any meaningful JPY depreciation, however, seems elusive in the wake of rising bets that the Bank of Japan (BoJ) will hike interest rates further amid signs of broadening inflation. Meanwhile, hawkish BoJ expectations led to the recent significant rise in Japanese bond yields. The resultant narrowing of the rate differential between Japan and other countries supports prospects for the emergence of some JPY dip-buying. This, in turn, warrants some caution before placing aggressive bullish bets around the USD/JPY pair ahead of the release of the FOMC minutes later today. 

Japanese Yen bulls have the upper hand amid hawkish BoJ expectations

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• Bank of Japan Governor Kazuo Ueda and Deputy Governor Himino recently signaled the possibility of another rate hike if the economy and prices align with the projections. 

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• Adding to this, BoJ Board Member Hajime Takata said on Wednesday that the central bank must gradually shift policy to avoid upside price risks from materializing.

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• Moreover, Japan's upbeat Q4 Gross Domestic Product (GDP) print on Monday boosted bets for further policy tightening by the BoJ amid signs of persistently high inflation. 

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• The International Monetary Fund estimates Japan's neutral rate to be between 1% and 2%, and anticipates the BoJ to raise rates to around the mid-point of 1.5% by the end of 2027.

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• The yield on the benchmark 10-year Japanese government bond reached levels not seen since 2010 earlier this week, which should continue to underpin the Japanese Yen.

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• Officials from the US and Russia held a crucial meeting in Saudi Arabia to discuss ways to halt the almost three-year-old war in Ukraine and also agreed to hold more talks.

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• Furthermore, a delay in the implementation of US President Donald Trump's reciprocal tariffs remains supportive of a positive risk tone and undermines the safe-haven JPY. 

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• Market participants now look forward to the release of minutes of the Federal Reserve's latest policy meeting in January for fresh cues about the future interest rate-cut path.

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USD/JPY could attract fresh supply and remain capped near the 200-day SMA

From a technical perspective, any subsequent move up is more likely to face stiff resistance near the 200-day Simple Moving Average (SMA), currently pegged near the 152.65 region. This is followed by the 153.00 mark and the 100-day SMA barrier, around the 153.30-153.35 zone, which if cleared decisively should pave the way for additional gains. The USD/JPY pair might then accelerate the positive move towards reclaiming the 154.00 mark en route to the 154.45-154.50 supply zone, last week's swing high, around the 154.75-154.80 region, and the 155.00 psychological mark. 

On the flip side, weakness below the 151.75 area, or the Asian session trough, could extend towards the overnight swing low, around the 151.25 region. Some follow-through selling, leading to a subsequent breakdown below the 151.00 mark, will be seen as a fresh trigger for bearish traders. The USD/JPY pair might then accelerate the fall towards the 150.60 intermediate support before eventually dropping to the 150.00 psychological mark. The downward trajectory could extend further towards the 149.60-149.55 region en route to the 149.00 mark and the December 2024 low, around the 148.65 region.