USD/JPY: A Year of Change — Analyzing 2024’s Potential Shifts
USD/JPY has had a strong year in 2023, with policy and economic changes in the US and Japan. However, as the year ended, the pair fell. As we look ahead to 2024, a lot might happen to continue this trend. In this article, we will recap what happened in the last two months of 2023 and find out what the upcoming 2024 looks like.
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Recent changes in the USD/JPY exchange rate
As seen below, the pair has risen and fallen recently as Japan and the US experienced economic and policy changes.
Trigger for USD/JPY Downtrend
USD/JPY has been on a strong uptrend in 2023. However, this changed to a decline starting in mid-November. The main catalyst for this move was the change in the Fed’s stance to dovish. This new stance led to a significant drop in the dollar. Additionally, investors have been more hopeful that the Bank of Japan will change its policy next year, boosting the yen.
The dollar fell by 2.3% in November, marking its most significant monthly decline since December last year. This drop was mostly because traders started betting heavily on Fed rate cuts starting as early as March next year.
On December 1st, Fed Chair Jerome Powell was cautious in his speech about any more rate hikes, saying the risk between under- or over-tightening was more balanced. The market interpreted his remarks as dovish, meaning that the Fed has likely finished its rate hikes. Moreover, Powell said that US monetary policy was slowing the economy as expected.
On December 7th, the yen rose sharply by over 2%, reaching a multi-month high against the dollar. This surge came after Bank of Japan Governor Kazuo Ueda’s statement that policy management would become “even more challenging from the year-end and heading into next year.” Ueda also highlighted various options for potential future actions. The market took this as a sign the bank was ready for a policy shift.
What caused the recent rise in USD/JPY?
The most recent rise in the USD/JPY pair came after the BoJ policy meeting on December 19th. The Bank of Japan adhered to its widely anticipated decision by maintaining its ultra-loose policy. The bank chose to wait for additional evidence to determine if wages and prices would increase sufficiently, justifying a departure from extensive monetary stimulus. Additionally, the central bank retained its dovish policy guidance, disappointing some traders who had hoped for language signaling a potential end to negative interest rates in the near term.
Policy and economic changes in the US and Japan
The US and Japan have witnessed policy and economic changes contributing to the recent moves in USD/JPY.
US Economic Indicators: Employment and Inflation Data
Economic changes in the US included major reports like employment and inflation. First came the NFP report, which came in higher than expected. US job growth increased in November, and the unemployment rate decreased to 3.7%, indicating a robust labor market. Despite this, the employment report from the Labor Department did not alter the perception that the Federal Reserve had concluded its cycle of raising interest rates. The decline in the unemployment rate, down from October’s 3.9%, eased concerns about the economy teetering on the brink of recession. Nonfarm payrolls shot up by 199,000 jobs last month, following an unrevised increase of 150,000 in October.
The US also released important inflation data that strengthened expectations of Fed rate cuts. Unexpectedly, US consumer prices increased in November, driven by rising rents. Despite some stronger elements in the CPI, economists found encouragement in the overall inflation trend and anticipated milder readings in the coming year. In November, consumers significantly dialed back their expectations for inflation.
On the policy front, the Fed held its most recent meeting on December 13th, leaving interest rates unchanged. The outcome was seen as dovish and led to a significant decline in the dollar. Moreover, Powell admitted that the Fed was likely done with rate hikes and would soon start cutting rates.
Japan’s Economic Outlook: Inflation Data and Policy Responses
In Japan, economic releases included inflation data. Although Japan’s national core CPI rose to 2.9%, it failed to meet forecasts of 3.0%. Meanwhile, the Tokyo Core CPI fell to 2.3% year on year in November.
On the policy side, the Bank of Japan maintained its ultra-loose policy and dovish outlook at its most recent meeting. The BoJ maintained a short-term rate target of -0.1% with a 10-year government bond yield target of around 0%. The bank said it was committed to increasing stimulus if necessary.
Anticipating 2024: Potential Turning Points
2024 could be the year when the BoJ finally abandons its ultra-easy monetary policy. Therefore, it could be a year for a stronger yen and a downtrend for USD/JPY. Approximately 20% of economists in a Reuters poll anticipate that the Bank of Japan will start easing its ultra-loose monetary policies as soon as January.
Concurrently, more than 80% of economists predict that the Japanese central bank will abandon negative interest rates by the end of the next year. Still, the BoJ has ended this year among the world’s most dovish central banks, even as economists foresee the possibility of interest rate hikes in the near future.
Meanwhile, in the US, investors are pricing in rate cuts as early as March. This dovish shift will likely keep weighing on the dollar, further supporting a downtrend for USD/JPY.
Some major events to watch in early 2024 include the Japan and US monetary policy meetings. The BoJ will convene on the 23rd of January, while the Fed will meet on the 31st of January.
USD/JPY Technical Outlook
On the technical side, USD/JPY has broken out of its bullish channel support, signaling a possible bearish reversal. The price had traded in this channel for most of 2023, respecting the support and resistance levels.
However, bears got strong enough to breach the channel support and the 144.05 key support level. Moreover, the price is now making lower lows and highs below the 22-SMA, showing a bearish trend.
However, the price may pull back to retest the recently broken channel support as resistance before the downtrend continues. If bears keep control, the price will likely break below the 144.05 support level, with the next hurdle at the 138.04 key support level.
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