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  • Technical selling in the US dollar appears to be weighing on the USD/JPY pair and it has dropped below 104.00.
  • US/Japan interest rate differential are likely to play an important role in USD/JPY price action going forward.

Technical selling in the US dollar appears to be weighing on the USD/JPY pair, as the US Dollar Index drops to fresh weekly lows in the 90.20s. USD/JPY has subsequently dropped back below the 104.00 level and towards 103.90, as well as below its 50-day moving average (which resides at pretty much bang on 104.00). The pair is currently now running into support in the form of the 16, 21 and 28 December highs at 103.90 and a break below this level could open the door for a move towards the pair’s 21-day moving average which resides just above the 103.50 mark. At present, USD/JPY trades with losses of just over 30 pips on the day or around 0.3%.

The pair does not seem to have specifically reacted to a recent flood of Fedspeak; FOMC member Loretta Mester sounded dovish on the Fed’s QE programme, saying that the Fed will make sure it communicates well in advance its intentions for any changes to the asset purchase prorgamme, which will be tapered once the Fed is ready and not reduced suddenly. She added that it is very premature to think we are getting to the point to change policy, which she said she is happy to maintain for the moment.

FOMC member James Bullard was optimistic on the outlook for the US economy in 2021 but agreed that the Fed is “not close” to tapering its bond-buying programme yet. Elsewhere, FOMC member Ester George said that it was too soon to speculate about possible changes to Fed policy.

USD/JPY conforms to US dollar flows

USD/JPY is today trading as a function of USD dynamics, which in recent trade has meant USD weakness. As noted above, DXY has slid to fresh weekly lows under 90.20 in recent trade, with technical selling upon confirmation of a breakout below a pennant structure that prices had been consolidating within so far on the week also weighing. Price action in USD/JPY on the year thus far has been to a large extent determined by US-Japanese rate differentials; 10-year yields dropped back from highs above 1.17% in recent trade after a strong auction and the subsequent drop in yields appears to be weighing on the USD/JPY pair.

Where US yields go from here will be important; do they continue to rise on expectations for a flood of new debt issuance under the incoming Biden administrations, for a subsequent much faster than expected growth rebound in 2021 and on higher inflation expectations? Or does the knowledge that the Fed’s QE programme, which keeps yields capped, is not going anywhere any time soon keep yields subdued?