USD/JPY Drops Near 157.30 Despite USD Index Hitting a Two-Year High

The USD/JPY pair fell to near 157.30 during Monday’s European trading session, marking a significant decline even as the US Dollar Index (DXY) surged to a two-year high above 110.00. The drop reflects the combined effects of renewed strength in the Japanese Yen (JPY) as a safe-haven currency and shifting market expectations regarding US Federal Reserve monetary policy.

Key Drivers Behind USD/JPY Movement

1. Strength in the US Dollar:

   • The US Dollar remained resilient, driven by Friday’s robust Nonfarm Payrolls (NFP) report, which showed stronger-than-expected job creation and a decline in the unemployment rate.

   • Market analysts revised expectations for interest rate cuts by the Federal Reserve (Fed), with Macquarie forecasting only one rate cut this year, compared to the Fed’s previous guidance of two cuts.

2. Japanese Yen’s Safe-Haven Appeal:

   • Risk aversion intensified as global equities experienced sharp sell-offs, fueling demand for the Yen, traditionally viewed as a safe-haven asset.

   • Concerns about US President-elect Donald Trump’s upcoming return to the White House on January 20 heightened market uncertainty, contributing to the Yen’s strength.

3. Bank of Japan (BoJ) Rate Hike Expectations:

   • Growing expectations for additional interest rate hikes by the BoJ in its March meeting have supported the Japanese Yen.

   • The BoJ has taken a more hawkish stance recently, signaling potential policy adjustments amid persistent inflationary pressures in Japan.

   
   

Upcoming Economic Data and Market Focus

Investors are now closely watching the US Consumer Price Index (CPI) data for December, scheduled for release on Wednesday. The data will be pivotal as the Fed continues to weigh inflation dynamics against its 2% target.

Fed policymakers have voiced concerns about slowing progress in reducing inflationary pressures, which could influence the central bank’s interest rate decisions in the months ahead.

Technical Analysis: USD/JPY Faces Support Near 157.00

• Support Levels:

  • Immediate support is seen at the psychological level of 157.00.

  • A breach of this level could open the door for further declines toward 155.80.

• Resistance Levels:

  • On the upside, the pair faces resistance at 158.30.

  • A break above this level could challenge the next key barrier at 159.00.

• Momentum Indicators:

  • The 14-day Relative Strength Index (RSI) indicates bearish momentum, pointing to potential near-term weakness.

  • The pair is trading below its 20-day Exponential Moving Average (EMA), reinforcing a bearish outlook.

Outlook for USD/JPY

The USD/JPY pair remains under pressure despite the US Dollar’s strength, primarily due to the Yen’s growing safe-haven appeal and hawkish expectations for the BoJ. The pair’s trajectory will hinge on key US economic data releases this week, including CPI, which could shape the Fed’s policy outlook and impact market sentiment.

While the longer-term outlook for USD/JPY is tied to central bank divergence, the near-term focus remains on risk sentiment and technical support levels. Should risk aversion persist and BoJ hawkish expectations solidify, the Yen may continue to gain ground against the Dollar.