Japanese Yen struggles to capitalize on its modest intraday gains against US Dollar

• The Japanese Yen attracts buyers on Monday and recovers a part of last week’s heavy losses.
• Diminishing odds that the BoJ will exit its ultra-lose policy in January cap any further upside. 
• Elevated US bond yields continue to underpin the USD and lend some support to USD/JPY.

The Japanese Yen (JPY) attracts some haven flows on the first day of a new week and drags the USD/JPY pair away from over a three-week high, around the 146.00 neighbourhood touched on Friday. Against the backdrop of China's economic woes and geopolitical risks, diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed) weigh on investors' sentiment and benefit the traditional safe-haven JPY. 

However, growing acceptance that the Bank of Japan (BoJ) will not abolish its negative interest rates policy at the January 22-23 meeting in the wake of the New Year's Day earthquake in Japan keeps a lid on any further gains for the JPY. The US Dollar (USD), on the other hand, struggles to capitalize on its recent goodish recovery from a multi-month low amid bets that the Fed will start cutting interest rates as early as March. 

That said, the incoming US economic data pointed to a still-resilient economy and gives the Fed more headroom to keep interest rates higher for longer. This, along with the recent hawkish remarks by Fed officials, remains supportive of elevated US Treasury bond yields. This, in turn, is seen acting as a tailwind for the Greenback and lending support to the USD/JPY pair, warranting some caution before placing directional bets. 

Daily Digest Market Movers: Japanese Yen benefits from reviving safe-haven demand, lacks bullish conviction

• The Japanese Yen declined over 2% last week and recorded its worst weekly performance since June 2022 amid fading hopes for an imminent shift in the Bank of Japan's policy shift later this month.
• A robust December US jobs report further raises uncertainty over the Federal Reserve's rate cuts trajectory, which underpinned the US Dollar and lifted the USD/JPY pair to a three-week high on Friday.
• The headline NFP print showed that the US economy added 216K new jobs in December as compared to 170K expected, while the unemployment rate held steady at 3.7% vs. an uptick to 3.8% anticipated.
• The upbeat data was offset by the Institute for Supply Management (ISM) survey, which indicated that the US services sector, which accounts for more than two-thirds of the economy, slumped last month.
• The ISM's Non-Manufacturing Index dropped to 50.6 in December – the lowest reading since May – and the employment sub-component plunged to 43.3 – the lowest since July 2020 – from 50.7 in November.
• Separately, US Factory Orders increased more than expected in November, by 2.6% after declining 3.4% in October, though did little to impress the USD bulls or provide any meaningful impetus.
• The data suggested that the world's largest economy showed pockets of weakness, though remained resilient overall, forcing investors to scale back bets for more aggressive easing by the Federal Reserve.
• Adding to this, Dallas Fed President Lorie Logan noted that if the US central bank does not maintain sufficiently tight financial conditions, there is a risk that inflation will pick back up, reversing progress.
• This comes after Richmond Fed President Thomas Barkin last week expressed confidence that the economy is on its way to a soft landing and said that rate hikes remain on the table.
• The markets, however, are still pricing in a greater chance of the first interest rate cut by the Fed at the March policy meeting and a cumulative of five 25 basis points (bps) rate cuts for 2024.
• This is holding back the USD bulls from positioning for any further appreciating move and keeps a lid on the USD/JPY pair as the focus now shifts to the US consumer inflation figures on Thursday.
• An agreement on a topline spending level has been reached by House Speaker Mike Johnson and Senate Majority Leader Chuck Schumer, breaking the deadlock to avoid a government shutdown.

Technical Analysis: USD/JPY remains on the defensive below mid-144.00s, downside potential seems limited

From a technical perspective, Friday's failure near the 50% Fibonacci retracement level of the November-December downfall warrants caution for bullish traders. Moreover, oscillators on the daily chart – though recovered from the bearish territory – are yet to confirm a positive bias. Hence, it will be prudent to wait for some follow-through buying beyond the multi-week high, around the 146.00 mark, before positioning for an extension of the USD/JPY pair's recent recovery from the 140.25 region, or a multi-month trough touched in December. The subsequent move up has the potential to lift spot prices beyond the 146.55 intermediate hurdle, towards reclaiming the 147.00 mark en route to the 147.40-147.45 confluence, comprising the 61.8% Fibo. level and the 100-day Simple Moving Average (SMA).

On the flip side, the 144.00 mark is likely to protect the immediate downside ahead of Friday's swing low, around the 143.80 region, and the 200-day SMA, currently pegged near the 143.25 zone. A convincing break below the latter might shift the near-term bias back in favour of bearish traders and make the USD/JPY pair vulnerable to test the next relevant support near the 142.35-142.30 horizontal zone before eventually dropping to the 142.00 round figure. The downward trajectory could get extended further towards the 141.75 support en route to the 141.00 mark and the multi-month low, around the 140.25 region.

(This story was corrected on January 8 at 11:36 GMT to say that the US created 216K new jobs in December, not last week.)