USDJPY All eyes on ADP and NFP!

4 Jan

Firstly, the Japanese Yen (JPY) is experiencing downward pressure for several reasons. Recent domestic data indicating the fastest contraction in manufacturing activity in 10 months, coupled with the effects of a significant earthquake, have negatively impacted the currency. This situation undermines the JPY as it reflects a weakening of economic prospects. Conversely, the US Dollar (USD) finds support in an increase in US Treasury yields. The reluctance of USD bulls to place aggressive bets stems from the anticipation of potential interest rate cuts by the Federal Reserve (Fed), which could start as early as March. The Nonfarm Payrolls (NFP) report is a critical factor that could influence the future policy actions of the Fed and, consequently, the demand for USD. Its outcome could provide significant momentum to the USD/JPY pair depending on whether it aligns with market expectations on interest rates. On the other hand, the Bank of Japan (BoJ) might shift to a more hawkish stance due to economic pressures, which could limit further losses for the JPY. This expectation, along with a softer risk tone in the market, could help curb any substantial gains for the USD/JPY pair. From a trading perspective, the current environment suggests caution for those bullish on USD/JPY. While the USD has favorable winds from higher bond yields and a potentially hawkish Fed, the JPY has potential support from a change in BoJ policy and its status as a safe-haven currency amidst economic uncertainty. The price is at the 144.10 level where I've identified two scenarios: a bounce on the upper side of the bearish channel with a pullback towards 143 or a break of the bullish channel with a target of 146.70. US labor data today with the ADP and on Friday with the NFP will be important. Greetings and good trading to all.