USD/JPY edges higher ahead of BoJ decision, rising US yields

With a little upward trend, the USD/JPY pair moved up near the 143.00 mark. The BoJ meeting on Tuesday is anticipated by markets, which could influence the pair’s short-term trajectory. Japan’s political scandals might force the Bank of Japan to abandon its negative interest rate strategy.

US bond yields rose, which strengthened the US currency. The USD/JPY pair is moving noticeably higher during Monday’s session, hovering around the 143.00 mark. The pair and a risk-on atmosphere have been mostly driven by an increase in US rates, which has shifted demand away from the safe-haven JPY. The Japanese yen has a chance to beat the US dollar ahead of the Bank of Japan’s decision on Tuesday if the BoJ surprises markets by raising interest rates.

On the US side, the 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.

In the meantime, the yield on US Treasury is rising. The US dollar was favoured by the 5-year and 10-year rates, which both increased to 3.95%, while the 2-year rate remained at 4.45%.

Political unrest in Japan may accelerate the Bank of Japan’s (BoJ) timeframe for ending the Negative Interest Rate Policy (NIRP), which is good news for the JPY. This potential early exit from NIRP, likely before April, could bring volatility to the USD/JPY. After that, two 10 bps hikes from the BoJ are anticipated in 2024; but, given current global economic trends, this could be the last one.

Accordingly, on Tuesday, the markets will be closely observing the bank’s position and strategy in order to gather additional information about its next actions and to make their bets and positions.

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.