US Economic Data and the Fed in Focus

Later on Monday, US economic indicators are likely to influence US dollar demand and USD/JPY. Pending home sales and the Dallas Fed Manufacturing Index will be in focus. Given the strong third-quarter GDP numbers, the Dallas Fed Manufacturing Index will likely influence sentiment more than housing sector numbers.

Economists expect the Dallas Fed Manufacturing Index to increase from -10.4 in November to -2.5 in December.

A weaker-than-expected Dallas Fed Manufacturing index would signal a loss of economic momentum, weighing on the US dollar.

While the data will influence US dollar demand, Fed commentary will be key. Support for further rate cuts on inflation outlook and a weaker labor market would weigh on the US dollar, pushing USD/JPY lower.

According to the CME FedWatch Tool, the probability of a March Fed rate cut increased from 53.3% on December 26 to 54.8% on December 27.

Looking ahead, the prospects for further BoJ rate hikes, a new Fed Chair, and a deteriorating US labor market are likely to remain the key themes. These scenarios continue to support a bearish short- to medium-term outlook for USD/JPY.

Technical Outlook: USD/JPY on a Downward Trajectory

For USD/JPY price trends, technical indicators, and fundamentals will require close monitoring.

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

A drop below the 155 support level would bring the 50-day EMA into play. If breached, the 200-day EMA would be the next key technical support level. Crucially, a sustained break below the EMAs would signal a bearish trend reversal, paving the way toward 150.