USD/JPY sticks close to 113.50 level, 50DMA amid quiet start to busy week

• USD/JPY continues to trade close to its 50DMA and the 113.50 level as key market events are awaited.
• The most important event this week will be the Fed meeting, which should see the bank pivot hawkishly.

USD/JPY is trading in subdued fashion amid a quiet start to what will ultimately be a very busy week. The pair has been undulating just to the north of the 113.50 level and close to its 50-day moving average in the 113.60s, levels which have acted as a magnet for the price action for most of the last week. Ahead of key events later in the week, subdued trading conditions are likely to persist and, thus, playing the pair’s recent 113.25-114.00 ish range might be the way to go.

If long-term US yields continue to push lower (the 10-year is down about 5bps on the day and back below 1.45%), USD/JPY may well test the bottom of this range in the near future. Beyond these nearest levels of support and resistance, there is the 112.50 area to the downside, which is a double bottom from late November/early December, and there is the November (annual) high at 115.50.

Week Ahead

In terms of the major events in store this week, the highlights will be the Fed’s monetary policy decision on Wednesday, followed by the BoJ’s decision on Friday. There are also plenty of important economic data releases for FX market participants to sink their teeth into, including November PPI on Tuesday, November Retail Sales and the December NY Fed survey on Wednesday, weekly jobless claims numbers, November housing data, November Industrial production and the December Philly Fed and flash Markit PMI surveys on Thursday. Japan sees the release of November Industrial Production figures on Tuesday and then trade numbers on Thursday.

In terms of how markets might react to all of the above; the Fed meeting will be far and away the most important FX market driver of the week. US data is likely to by and large reinforce well-established narratives on the US economy such as high inflation pressures, coupled with strong growth, but supply chain disruptions still hurting output in some sectors (and contributing to higher prices). This is likely to feed into a stronger dollar, whilst it doesn’t seem there is much that the BoJ or Japanese data can do to help the yen, whose fate is likely to be determined more by broader risk sentiment/rate differentials. Case in point, the widely followed Tankan survey of large manufacturers saw its headline index improve for a sixth successive quarter and hit its highest since late 2018, but failed to stir any movement in FX.