USD/JPY trims losses on higher US Treasury yields, eyes on labor market data

• The USD/JPY wrestles near the 141.50 area.
• Markets currently project a considerable 160 basis points rate cuts by the Fed in 2024, weighting on the pair.
• Ahead of key NFP figures of December, weekly Jobless Claims came in higher than expected.

In Thursday’s session, the USD/JPY pair declined to 140.25 but then recovered to 141.50. Dovish bets on the Federal Reserve (Fed) made the markets dump the US Dollar, and disappointing US Jobless Claims, which rose in the third week of December, dragged the USD/JPY down. During the American session, a recovery in US yields seems to give the Greenback traction. Next week, the US will report additional key labor market figures.

During their final 2023 gathering, the Federal Reserve recognized an inflation deceleration, reinforcing the notion that there will be no rate increases in 2024, and the Summary of Economic Projections (SEP) showed that the Federal Open Market Committee (FOMC) members forecast 75 bps of easing. This led to a broad USD selloff, and markets are expecting a rate reduction in both March and May. The dovish sentiments got further impetus from the recent Personal Consumption Expenditures (PCE) data from November, the Fed’s preferred inflation metric, which came in lower than expected. The demonstration of decelerating inflation has subsequently suppressed the strength of the US Dollar.

In the meantime, US Treasury yields found support in multi-month lows and recovered. The 2-year rate is at 4.28%, while the 5-year and 10-year yields sit at 3.85 each, and their upward movements helped the pair trim losses.

Next week, the US is set to release key labor market statistics, including a Nonfarm Payrolls report, Average Hourly Earnings data, and the Unemployment rate. These figures will be critically observed as key indicators of the nation’s economic health, so in case further evidence of cooling down is shown, the pair may see further downside.

USD/JPY levels to watch

The daily chart suggests that the pair has a bearish outlook. The Relative Strength Index (RSI) is near oversold conditions, indicating that the selling pressure has perhaps been overextended, and a price recovery may be due soon. This somewhat contrasts with the Moving Average Convergence Divergence (MACD), where rising red bars denote that sellers still seem to be gaining momentum for the moment.

However, keeping in perspective the broader trend, the pair is trading below its 20, 100, and 200-day Simple Moving Averages (SMAs). This is usually a strong bearish sign, signifying that the overall trend remains in the favor of sellers.

Support Levels: 140.20,140.00,139.00.
Resistance Levels:142.95 (200-day SMA),144.00 (20-day SMA),145.00..

USD/JPY daily chart