KEY POINTS:
- US dollar weakened after soft US ISM Manufacturing PMI
- Market pricing for the Fed remained unchanged around 62 bps of easing expected by year-end
- US NFP the main event this week
- Japanese inflation remains above target but not calling for urgent action
- BoJ still focused on wage growth
- Traders expect roughly two rate hikes from the BoJ this year
FUNDAMENTAL OVERVIEW
USD:
The US dollar weakened across the board yesterday following a soft US ISM Manufacturing PMI. The data wasn’t really surprising, but after a strong rally in the European session, the greenback gave back all the gains.
In terms of macro, nothing has changed in these two weeks. The latest NFP and CPI reports came both on the softer side and the market is still pricing 62 bps of easing by year-end. The data in December was taken with a pinch of salt given the shutdown related issues, but the next releases will give us a clearer picture.
The market expects the Fed to cut in March at the earliest, so we will need very soft data this month to force them to act sooner. Nonetheless, if the data continues to come in on the softer side, the market will likely increase the total easing for 2026 and that should weigh on the US dollar.
On the other hand, if the data shows strength, traders will likely pare back their rate cut bets and that will likely offer the greenback some support.
JPY:
On the JPY side, the latest Tokyo CPI data surprised to the downside. Inflation has been hovering above the BoJ’s 2% target but never called for urgent actions. The central bank is still placing a great deal on wage growth, so wage data and spring wage negotiations remain key.
The market is pricing 42 bps of tightening this year, which translates into roughly two rate hikes. Traders don’t expect any policy action before June. Therefore, we will need some strong wage data or surprisingly high inflation prints to see traders bringing forward rate hike expectations.
USDJPY TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can see that we have a strong support zone around the 154.50 level where the price got rejected from several times in the past weeks. From a risk management perspective, the buyers will have a better risk to reward setup around the support to position for a rally into the 160.00 handle next. The sellers, on the other hand, will want to see the price breaking lower to pile in for a drop into the major trendline around the 151.00 level.
USDJPY TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we can see that we’ve had a messy price action lately, not giving us any clear level where to lean on. We have a minor upward trendline that could act as support. The buyers will likely step in there with a defined risk below the trendline to position for a rally into new highs, while the sellers will look for a break lower to increase the bearish bets into the 154.50 support.
USDJPY TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we can see that we’ve been trading inside what looks like a broadening wedge. The buyers will likely keep on leaning on the bottom trendline to keep pushing into new highs, while the sellers will either look for a breakout or keep shorting around the top trendline. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Tomorrow we have the US ADP, the US ISM Services PMI and the US Job Openings data. On Thursday, we get the Japanese wage data and the latest US Jobless Claims figures. On Friday, we conclude the week with the US NFP report.
