- USDJPY breaks lower amid sustained USD selling.
- Bets for less aggressive Fed rate hikes and sliding US bond yields weigh on the buck.
- The risk-on impulse could undermine the safe-haven JPY and lend support to the pair.
- A more dovish BoJ might also hold back bears from placing fresh bets around USDJPY.
The USDJPY plunges lower on Friday following up the previous day's softer US CPI-inspired slump to the 140.20 area, or a two-month low. The pair is now trading below 140.00, has broken out of a long-term rising channel on an intraday basis, and if the break holds on a daily basis, could be on course to weaken substantially further, possibly even to as low as the vicinity of the 200-day Simple Moving Average in the 132.00s, if the channel breakout fullfills its price objective.
The US Dollar (USD) drops to its lowest level since August 18 during the first half of the European session and turns out to be a key factor acting as a headwind for the USDJPY pair. The latest US consumer inflation figures released on Thursday indicated that the worst of the post-pandemic price spike is over. This, in turn, reaffirms expectations that the Federal Reserve will slow the pace of its policy tightening in the coming months, which, in turn, continues to weigh on the greenback.
In fact, the current market pricing points to over an 80% chance of a 50 bps Fed rate hike in December as compared to the probability of 56.8% before the US CPI report. Moreover, expectations for peak US interest rates also dropped below 5%, which is evident from a further decline in the US Treasury bond yields. The resultant narrowing of the US-Japan rate differential offers some support to the Japanese Yen and further contributes to the USDJPY pair's intraday pullback of over 170 pips.
That said, the prevalent risk-on mood, as depicted by a strong rally in the equity markets - might hold back traders from placing aggressive bearish bets on USDJPY. Apart from this, a more dovish stance adopted by the Bank of Japan could help ease the bearish pressure. Nevertheless, spot prices remain on track to register losses for the fourth successive week and the technical picture looks decidedly bleak. Traders now look to the Preliminary Michigan US Consumer Sentiment Index for some impetus.
Technical levels to watch
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