Stronger external demand and a pickup in economic momentum will likely strengthen the yen. Rising yen demand supports a bearish USD/JPY trajectory in the lead-up to the BoJ’s monetary policy decision, with 153 in view.

While market bets on a December BoJ rate hike have strengthened the yen, US retail sales data will give insights into the US economy, triggering USD/JPY volatility.

US Retail Sales to Spotlight the Greenback

Later on Wednesday, US retail sales will fuel speculation about a March Fed rate cut, influencing the US dollar’s trajectory. Economists forecast retail sales to rise 0.3% month-on-month in November after stalling in October.

Stronger retail sales would boost the US economy, given that private consumption accounts for roughly 65% of the GDP. Additionally, consumer spending typically fuels demand-driven inflation, suggesting a more hawkish Fed rate path. Fading bets on a March Fed rate cut will likely lift US dollar demand, cushioning the near-term downside for USD/JPY.

Beyond the data, traders should monitor FOMC members’ speeches for reactions to November’s jobs report and the timeline for a rate cut. Fed Board of Governors Christopher Waller, New York Fed President John Williams, and Atlanta Fed President Raphael Bostic are due to speak mid-week. Support for further monetary policy easing would overshadow upbeat retail sales data, sending USD/JPY lower on weaker US dollar demand.

For context, US unemployment rose from 4.4% in October to 4.6% in November, while wage growth slowed from 3.7% YoY to 3.5% YoY in November. Rising unemployment and softer wage growth may curb consumer spending and dampen demand-driven inflation.

A cooler inflation outlook would support a more dovish Fed rate path and weaken US dollar demand.

According to the CME FedWatch Tool, the probability of a March Fed rate cut increased from 51% on December 15 to 53.3% on December 16 as markets reacted to the US jobs data. A BoJ rate hike and a March Fed rate cut would narrow the US-Japan rate differential, favoring the yen.

The BoJ and the Fed’s policy outlooks support a bearish short- to medium-term outlook for USD/JPY.

Technical Outlook: USD/JPY on a Downward Trajectory

With markets focused on monetary policy, technical indicators, and fundamentals, they will offer critical insights into potential USD/JPY price trends.

Looking at the daily chart, USD/JPY remained above the 50-day and 200-day Exponential Moving Averages (EMAs), signaling a bullish bias. While technicals remained bullish, fundamentals are increasingly outweighing the technical structure, suggesting a bearish outlook.

A break below the Tuesday, December 16, low of 154.394 would bring the 50-day EMA into play. If breached, 153 would be the next key support level. Importantly, a sustained drop below the 50-day EMA would signal a bearish near-term trend reversal, exposing the 200-day EMA and 150.