The US dollar came under pressure in December 2023 amid sharply revised interest rate expectations. Now, the markets expect an 85% probability of a US rate cut by the Federal Reserve in March, with a full rate cut expected by May, and six cuts in 2024. In contrast, the Bank of Japan is now prepared to change its negative interest rate policy by tightening its policy in the same year, which brought selling pressure to USD/JPY, pushing it towards the 140.25 its lowest level in five months support level. As trading in 2024 began, the USD/JPY pair attempted to recover, with gains reaching the 142.41 resistance level, which is stable at the time of writing.
In general, the beginning of 2024 will depend on whether US data supports the early cuts by the US Federal Reserve or forces a market reassessment. According to other Forex currency market trades, the euro/dollar exchange rate (EUR/USD) has reached its highest levels in 5 months. Therefore, it may face difficulties in maintaining levels above the psychological resistance of 1.1000 in January. Also, the price of the British pound against the dollar (GBP/USD) retreated from its recent highs. Today's Fed meeting minutes and Friday's US Labor data, especially the non-farm payrolls report, will be crucial in shaping expectations and influencing currency markets.
Generally, the sharp adjustment in US interest rate expectations during December put the dollar under pressure as the long-term rally collapsed and US yields fell sharply. At this point, markets are now calculating a little more than an 85% chance of a rate cut by the US Federal Reserve at its March policy meeting. Obviously, the cut is fully priced in for May with more than a 70% chance of two rate cuts. Also, Markets expect six cuts in US interest rates during 2024.
Meanwhile, the main element at the beginning of 2024 will be whether US data releases and the Federal Reserve narrative provide justification for the expectation of an early rate cut from the Federal Reserve, or whether the markets are forced to retreat. In general, a relatively cautious Fed narrative and weaker data would provide more ammunition for dollar bears, but strong data and a hawkish Fed narrative would lead to some reversal in expectations.
Today, the minutes of the Federal Reserve meeting in December are due to be released. Chairman Powell's comments following the December Fed meeting were also a major factor in undermining dollar gains, as he indicated that the agenda would move towards rate cuts in 2024. The committee also projected that three rate cuts are likely by the end of 2024. Also, the Fed minutes will provide a key insight into whether the majority on the committee supports this narrative.
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USD/JPY Technical analysis and Expectations Today:
USDJPY made lower highs and slightly lower lows to consolidate within a falling wedge pattern on the hourly time frame. Currently, the price is testing the resistance level and may return to the wedge support soon. Also, technical indicators indicate a continuation of the decline. Technically, The 100 SMA is below the 200 SMA to confirm that the general trend has turned bearish or that selling is likely to gain momentum.
The Stochastic indicator turns lower after reaching the overbought area, which also reflects the return of downward pressure. Meanwhile, the RSI is pointing down, so the price may follow suit while there is selling momentum. Thus, Stronger selling pressure could trigger a breakout below the wedge support at the key psychological mark at 140.00 and a sell-off at the same height of the formation. Likewise, a break above the resistance level around 142.00 resistance could be followed by a rally of the same size as the wedge.
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