USD/JPY bounces back strongly on lower US Jobless Claims

USD/JPY extends recovery as US Initial Jobless Claims for the week ending Dec 27 came in lower-than-expected.
The Fed is expected to reduce interest rates gradually this year as officials are confident over US economic outlook.
Japan Kato warned about intervention against excessive FX moves.

The USD/JPY pair bounces back from the intraday low of 156.43 in the North American session on Thursday. The asset recovers as the US Dollar (USD) posts a fresh two-year high, with the US Dollar Index (DXY) rising above 108.80, as United States (US) Initial Jobless Claims for the week ending December 27 have come in lower-than-projected.

The Department of Labour reported that individuals claiming jobless benefits for the first time were 211K, lower than estimates of 222K and the former release of 220K, upwardly revised from 216K.

The Greenback was already performing strongly on expectations that the Federal Reserve (Fed) will reduce interest rates gradually this year.

The pace of interest rate cut by the Fed in 2024 was slightly aggressive as policymakers were focused on improving labor market conditions than lowering price pressures. In the process, the Fed reduced its key borrowing rates by 100 basis points (bps) in last three monetary policy meetings.

For this year, Fed officials have guided fewer interest rate cuts as they are upbeat on the United States (US) economic outlook. The latest dot plot showed that policymakers collectively see Federal Funds rate heading to 3.9% by the year-end.

Meanwhile, the Japanese Yen (JPY) performs strongly against its major peers on Thursday amid worries that Japanese administration could intervene in the FX domain against excessive foreign exchange moves. Japan Finance Minister Katsunobu Kato said last week that authorities are watching FX moves closely and will act to stabilize faltering Yen.

Economic Indicator

Initial Jobless Claims

The Initial Jobless Claims released by the US Department of Labor is a measure of the number of people filing first-time claims for state unemployment insurance. A larger-than-expected number indicates weakness in the US labor market, reflects negatively on the US economy, and is negative for the US Dollar (USD). On the other hand, a decreasing number should be taken as bullish for the USD.

Why it matters to traders?

Every Thursday, the US Department of Labor publishes the number of previous week’s initial claims for unemployment benefits in the US. Since this reading could be highly volatile, investors may pay closer attention to the four-week average. A downtrend is seen as a sign of an improving labour market and could have a positive impact on the USD’s performance against its rivals and vice versa.

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