USD/JPY Price Outlook – Yen Extends Gains as Key Confluence Level Approaches

• The Yen strengthens against the US Dollar amid growing expectations of a December rate hike by the Bank of Japan (BoJ).
• Market sentiment is shifting towards a BoJ policy normalization, with a 61% probability priced in for a 25 bps hike.
• US economic data has added to USD weakness today aiding Yen gains.
• USD/JPY approaches a key confluence support area between 150.80 and 150.00.

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USD/JPY has continued its decline today as US Dollar weakness continued. The Yen has benefitted from rising expectations of a December rate hike from the Bank of Japan (BoJ) given the more hawkish rhetoric by policymakers of late.

BoJ Rate Hike in December?

As you can see from the chart below, markets are pricing in around a 61% chance of a 25 bps hike by the BoJ in December. This comes as the probability of a December rate cut from the Federal Reserve has increased around 10% this week to rest at around 67%.

Source: LSEG (click to enlarge)

There has long been a push for the BoJ to normalise policy and something which current Governor Ueda was brought in for. However, the Governor has been resolute since taking office that he will only act when he is happy with wage growth data in Japan. The Governor had been adamant that wage growth needed to outpace inflation before significant rate hikes. 

The recent inflation data from Japan has added to the belief that a rate hike might be forthcoming in December. The annual inflation rate in Japan fell to 2.3% in October 2024 from 2.5% in the prior month, marking the lowest reading since January. This has strengthened the case for a rate hike yet by no means is it a foregone conclusion as the BoJ has a tendency to throw up surprises. 

Governor Ueda’s recent hawkish rhetoric was largely linked to the Yen’s decline against the US Dollar. However, if the Yen gains ground ahead of the BoJs December meeting there is a possibility that a hike may not materialize. 

Looking at where policymakers stand regarding possible rate hikes and the infographic below shows a split in policymakers opinions. It seems as though we have more doves than hawks which may be a concern heading into the December meeting. 

Source: LSEG (click to enlarge)

*note that the infographic above is from August.

US Data Strengthens Probability of December Fed Rate Cut

US Data released earlier today has strengthened the probability of a Fed rate cut in December. Following on from the FOMC minutes yesterday where Fed policymakers hinted at further rate cuts, albeit gradually. Market expectations increased after today’s data to around a 67% probability of a 25 bps cut, up from 62% prior to the data.

Jobs data in particular remains key for the Fed and with initial jobless claims coming in steady at 213k, a rate cut does seem probable. There is of course one more jobs report (NFP) and an inflation release ahead of the Feds December meeting which could impact the Fed decision in December.

Technical Analysis

From a technical standpoint, USD/JPY is currently trading below the 200-day MA on the daily timeframe for the first time in a month. The four-hour chart shows that price is trading below the 100-day MA as well adding further fuel to a growing bearish bias.

The DXY has finally experienced some sustained weakness this week as well which is also aiding the decline of USD/JPY. 

USD/JPY is approaching a key confluence area however, which rests between the 150.80 and psychological 150.00 handle. The ascending trendline and key area of support make a bounce from this level seem appealing and thus my apprehension regarding further downside. 

A break of this confluence area however could open up a longer term downtrend toward the 145.00 or even the 141.00 handles. 

Looking at resistance levels, if price does choose to bounce from current levels, immediate resistance rests at 151.991 before the 153.58 handle comes back into focus.

USD/JPY Chart, November 27, 2024

Source: TradingView (click to enlarge)

Support

• 150.80
• 150.00
• 149.29 (100-day MA)

Resistance

• 151.99
• 153.58
• 155.00 (psychological level)

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