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  • USD/JPY fillis the opening gap but risks remain skewed to the downside.
  • Iran and Us threats are dominating the headlines with are making for a risk-off the start to the week, extending last week’s losses of USD/JPY.

USD/JPY is trading back to the 21-hour moving average having filled the bearish opening gap following a risk-off start to the week. USD/JPY has travelled between a high of 108.10 and a low of 107.77, making a round-turn on the session so far. 

Last Friday, the defensive yen outperformed, falling to what was at the time the lowest since early October – today’s low was lower still. The news that Iran was plotting “imminent and sinister attacks” against American diplomats and military personnel on Friday sparked a risk-off rally supporting the yen. Weekend reports stated that Iran has pledged retaliation and today said it was no longer bound by any restrictions of the nuclear agreement. We can expect further antagonistic updates throughout what is likely to be a risk-off week ahead and supportive for the yen.

In other news, from Friday, the US Dec manufacturing ISM survey was dismal, falling from 48.1 to 47.2 (est. 49.0). The FOMC minutes for the 10-11 December meeting were as expected. The Fed is expected to stay on hold for the foreseeable future. Federal Reserve projections show no interest-rate changes next year but the annual rotation among voters could still influence policy as incoming members include an outspoken dove while two hawks depart.

“The minutes reiterated that officials view the current stance as “appropriate” and that recession risks over the medium term had declined “noticeably.” Inflation is generally expected to rise to the 2% goal, but participants “generally expressed concerns” over inflation continuing to run below target,” analysts at Westpac pointed out. 

As for yields, the US 2-year Treasury yields fell from 1.57% to 1.51% – the lowest since early Nov, 10-year yields from 1.88% to 1.79%. “Markets are pricing a near-zero chance of easing at the next Fed meeting on 29 January but a terminal rate of 1.28% (vs Fed’s mid-rate at 1.63% currently),” analysts at Westpac explained. 

Looking ahead of the week

The main focus for the calendar will be on the US Payrolls which analysts at TD Securities suggest probably slowed significantly after an exaggerated surge in November (266K and around 220K excluding returning strikers). “Even our below-consensus 145K forecast implies a strong 189K average for Q4, above the 173K average for the first nine months of the year. We expect the unemployment rate to hold at 3.5% and average hourly earnings to hold at 3.1% YoY.”

USD/JPY levels

Valeria Bednarik, the Chief Analyst at FXStreet, explained:

The USD/JPY pair finished the week just above 108.00, and around its 100 DMA, the first time around this last in over two months. It also broke below the 20 and 200 DMA, while daily indicators head south almost vertically and near oversold levels, all of which skew the risk to the downside. In the 4-hour chart, the pair is at risk of falling further, as, despite technical indicators recovered modestly from oversold levels, they hold below a bearish 20 SMA, which extends its slide below the larger ones.