The Yen Remains at the Mercy of External Factors

JAPANESE YEN FORECAST:

JAPANESE YEN FORECAST: NEUTRAL

• Dollar Index (DXY) Roars Back to Life as Safe Haven Demand Grows Due to the Conflict in the Middle East.
• Fed Officials Say that Higher Yields Are a Positive in the Fight Against Inflation.
• Developments in the Middle East and Federal Reserve Policymakers Will Drive Price Action in the Week Ahead.
• To Learn More About Price Action,Chart PatternsandMoving Averages, Check out theDailyFX Education Series.

READ MORE: EUR/USD Price Forecast: EUR/USD Prints Fresh Weekly with 200-Day MA in Sight

WEEK IN REVIEW

It’s been another intriguing week for the Japanese Yen with the Euro in particular down over 2% and around 370-pips to trade just below the 160.00 level. A surprising move considering we just heard this week from Bank of Japan monetary policy board member Seiji Adachi was quite adamant that Japan’s economy had yet to reach the stage at which an exit from current policy setting could be considered.

Source: Refinitiv

The BoJ has not yet given any significant sign that a change is imminent. I have reiterated countless times that a change will happen as Governor Ueda was brought in for this purpose. The comments by Adachi are correct however, in that one of the key aspects that the BoJ are monitoring is wage growth outpacing inflation. Given the tight labor market in Japan at present this could come to pass in the months ahead, assuming the current conditions remain the same. I firmly believe that will be the time that the BoJ will move to change their stance on monetary policy and is the most important data point moving forward.

THE WEEK AHEAD: EXTERNAL FACTORS TO DRIVE YEN PAIRS

Following excellent gains for the Yen this week, the question on everyone’s minds is can it continue? Looking at the drop in EURJPY and USDJPY and it is apparent that recent moves have largely been driven by the US Dollar and Euro weakness rather than the JPY.

I expect this trend to continue moving forward into next week, even though we do have a host of data from Japan. None of these data releases I expect would materially change the position of the BoJ even if it might elicit a short-term knee-jerk reaction. The biggest event for the Bank of Japan next week will be the GDP Annualized Growth Rate which is forecast to come in at -2.1%.

The biggest risks as mentioned are likely to come from US and Euro developments moving forward with monetary policy holding the key. A lot of the USD and Euro weakness came from expectation that rate cuts will arrive sooner than previously expected in 2024. As of earlier today market participants were pricing in as much as 125bps cuts from the ECB in 2024, this in large part explains the major selloff we saw in EURJPY.

The US side is seeing a similar repricing of rate cuts probability and next week is likely to be more volatile. Given that we have NFP data and ISM services data next week both of which still concern some members of the Federal Reserve and at this stage look like the biggest threat to inflation rising once more. A significant miss or beat by these two data releases we could be in for some real volatility.

For all market-moving economic releases and events, see the DailyFX Calendar

TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at the technical perspective and USDJPY has been on a downtrend since November 13 printing lower highs and lower lows. As things stand USDJPY is flirting with the 100-day MA with support just below as well resting at 146.50 with a break lower leading toward the key psychological 145.00 level.

If USDJPY pushes higher from here, there is resistance resting at 148.00 and above that we have the 149.00 resistance level. This actually might be better and provide a better risk to reward ratio for potential shorts. A change in structure at this stage will only come to fruition if we get a daily candle close above the 149.60 handle which would mean that the potential bearish setup is invalidated.

USD/JPY Daily Chart – December 1, 2023

Source: TradingView

Looking at EURJPY and the selloff accelerated today as mentioned earlier, largely down to the repricing of ECB rate cuts in 2024. Similar to USDJPY, EURJPY is testing the 50-day MA with a key support area resting just below at the 159.00 level.

Below this we have the 100-day MA is resting at 158.63 with a break of that level opening up the possibility of a selloff all the way down to the 200-day MA at 153.68.

Alternatively, a push higher from here would bring the resistance level at 161.85 into focus and this could provide potential short sellers with the best risk to reward opportunity.

EUR/JPY Daily Chart – December 1, 2023

Source: TradingView

Key Levels to Keep an Eye On:

Support Levels

Resistance Levels

IG CLIENT SENTIMENT

Taking a quick look at the IG Client Sentiment, Retail Traders are SHORT on EURJPY with 73% of retail traders holding SHORT positions. Given the Contrarian View to Crowd Sentiment Adopted Here at DailyFX, is this a sign that EURJPY may continue to Rise?

For a more in-depth look at EURJPY client sentiment and how to use it, download the guy below.

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda