Yen Stable, Dollar Strengthens on Fed Uncertainty

The Japanese yen experienced minimal movement as local markets resumed operations following an extended New Year's holiday. Purchasing Managers Index (PMI) data unveiled the fragility of Japanese economic activity, with the manufacturing sector remaining in contraction in December. Sentiment towards Japan further soured due to a devastating earthquake in central Japan, causing casualties and disrupting regional train lines.

In the broader Asian context, most currencies maintained a flat-to-low range, and the dollar rebounded to a three-week high amid uncertainty over the Federal Reserve's plans for interest rate cuts in 2024. The minutes from the Fed's December meeting provided little clarity on rate cut plans, unsettling risk appetite, especially considering the weak start to 2024 in financial markets.

Japan's services sector painted a more optimistic picture in December. Service activity expanded at a faster pace, driven by strong demand and increased confidence. The sector has been a consistent performer, marking 16 consecutive months of growth, countering the challenges faced by manufacturers.

New business volumes, particularly from domestic customers, contributed to the growth, resulting in an upturn in employment. However, new export business continued to contract for the third consecutive month, albeit at a milder rate. Rising operating costs prompted service providers to increase prices at the strongest pace since August, attributed to higher raw material, fuel, and labor costs.

Japan's manufacturing sector, in contrast, contracted at the steepest pace in ten months in December. Output and new orders declined due to market uncertainty, with weak demand noted in the electronics sector and sluggish investment activity. Input prices saw their fastest growth in three months, driven by higher raw material costs, possibly linked to a weaker yen. Output prices continued to rise but at the slowest pace in over two years. Manufacturers, however, expressed confidence in a demand recovery, especially for products like semiconductors.

The Japanese government slightly revised its economic projections for the current fiscal year but anticipated a slowdown in the next fiscal year starting in April.

In the currency markets, the dollar index and futures remained stable in Asian trade but close to a three-week high. The dollar staged a significant recovery from five-month lows at the end of 2023, with markets questioning the timing of the Fed's planned interest rate cuts.

The dollar's strength was bolstered by better-than-expected U.S. labor market data, which dampened expectations of multiple interest rate cuts by the Federal Reserve in 2024. A crucial nonfarm payrolls report awaited on Friday was expected to guide the outlook on Fed policy easing.

While U.S. employers slowed layoffs in December, with the fewest announced job cuts since July, the total for 2023 was the highest since 2020, mainly attributed to economic uncertainty and business closures in the technology and retail sectors. Despite the resilience of the labor market, financial markets continued to anticipate Fed interest rate cuts in March. Hence, it is anticipated that the currency market will remain without a distinct trading trend during this timeframe as traders await additional datasets and economic indicators. Meanwhile, fluctuations in USD/JPY trading are projected to persist with both upward and downward adjustments within the upper range.

Data for Technical Analysis (5H) CFD USD/JPY

Resistance : 144.88, 144.96, 145.10

Support : 144.60, 144.52, 144.38

5H Outlook   

1H Outlook    

Source: Investing.com

Buy/Long 1 If the support at the price range 144.10 – 144.60 is touched, but the support at 144.60 cannot be broken, the TP may be set around 144.93 and the SL around 143.85, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 144.88 – 145.38, TP may be set around 145.50 and SL around 144.35, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 144.88 – 145.38 is touched, but the resistance at 144.88 cannot be broken, the TP may be set around 144.57 and the SL around 145.63, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 144.10 – 144.60, TP may be set around 143.80 and SL around 145.13, or up to the risk appetite.       

Pivot Points Jan 05, 2024 02:30AM GMT

Sources: Investing 1, Investing 2