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Summary: The sudden shift in the balance of the pendulum is now evident in the USDJPY pair, as market expectations for the Fed's potentially final rate hike have changed dynamics. Meanwhile, the narrowing of the yield spread between US and Japanese bonds over the 10-year term has intensified the downward pressure on the USDJPY. Technical indicators suggest a battle for support around 146.50 amid bearish sentiments.

Fundamentals

The medium-term upward trend in USDJPY, likely a result of momentum and fundamental factors triggered by the "law of universal gravitation," has been in place since testing a low of 127.22 on January 16, 2022.

However, over the past week, USDJPY has experienced a significant decline, with an intraday drop of 1.00% at the time of writing, reaching 148.13, marking a new low since October 3.

External fundamental factors appear to be contributing to the substantial weakness in this asset, rather than Japan's inflation stickiness or the Ministry of Finance's threats of forex market intervention. The sudden shift in the balance of the pendulum is now evident as market expectations for the Fed's potentially final rate hike have changed.

The market currently anticipates the FOMC to ease restrictions in the first half of 2024, and the Fed's predictions for rate hikes at the December 2023 and January 2024 FOMC meetings have evaporated following the softening of the last US Consumer Price Index (CPI).

According to the latest data derived from the CME FedWatch tool, the 2023 "dot plot" predicts a rate of 5.50%-5.75%. Currently, there is zero likelihood of a federal funds rate hike next month and throughout the entire 2024 FOMC meetings. The earliest possibility of a rate cut is in March 2024 at 30%, followed by May and June 2024 with probabilities of 64% and 84%, respectively.

Furthermore, recent dovish expectations in US monetary policy have led to a softening after a significant rise in US bond yields since May 2023.

Over the past month, the yield spread between US and Japanese government bonds for the 10-year term has narrowed by 55 basis points, decreasing from 4.15% on November 14 to 3.60%.

Currently, the narrowing of the yield spread between US and Japanese bonds over the 10-year term is the most significant since March-April 2024. Additionally, the short-term 2-year yield spread between US and Japanese bonds has been consolidating below the key resistance level of 5.11. The decline in the US bond yield spread reduces its attractiveness to Japanese investors, thereby indirectly exerting downward pressure on the USDJPY exchange rate.

Technical Analysis

The USDJPY continued to face increased downward pressure on Monday, marking a third consecutive day of decline from the steep 151.43 top.

Last week's closing below the psychological level of 150.00 provided an initial bearish signal for further short-term declines, extending today below the 148.40 level. The daily chart structure still shows a death cross, boosting the bearish outlook.

If today's closing price falls below these levels again, it will increase signals of a double top and reversal, potentially triggering further retracement towards the next strong support levels at 146.30 and 145.84.

The softness in the daily chart supports short-term bearishness, although action may slow down due to oversold conditions. Ideally, any limited upward movement should face resistance at the breached 55-day SMA at 149.28 to maintain the integrity of the bearish trend and provide better selling opportunities. Only a sustained breakthrough above the 150.00 level would eliminate the immediate downside threat. In terms of trading, going short at highs is recommended as the main strategy.

Trading Recommendations

Trading Direction: Short

Entry Price: 148.70

Target Price: 140.04

Stop Loss: 151.50

Valid Until: 2023-12-04 23:55:00

Support: 147.29, 146.51, 146.30, 145.84

Resistance: 148.80, 149.28, 150.00, 150.38