US ISM Manufacturing PMI and Fed Speakers in Focus

Later on Monday, US private sector PMI figures are likely to influence demand for the US dollar and the USD/JPY pair. Economists forecast the ISM Manufacturing PMI to increase from 48.2 in November to 48.3 in December.

Typically, a less pronounced contraction, rising employment, and higher prices support a less dovish Fed policy stance, which would lift demand for the US dollar. While the sector accounts for around 10% of the US GDP, the underlying PMI data provide insights into the effect of tariffs and the higher interest rate backdrop on prices.

Last week, the less influential S&P Global US Manufacturing PMI revealed that tariffs continued to drive prices higher, suggesting a more hawkish Fed policy stance. However, the ISM Services PMI, due out on January 7, will be key, given that the sector accounts for roughly 80% of US GDP and is the key inflation contributor.

While the PMI data will influence US dollar demand, Fed commentary remains key for USD/JPY trends. Increased calls to cut rates to bolster the labor market would dampen demand for the US dollar, pushing USD/JPY lower.

According to the CME FedWatch Tool, the probability of a March Fed rate cut increased from 51.1% on January 2 to 54.0% on January 3.

Looking ahead, expectations of further BoJ rate hikes, a new Fed Chair, potentially favoring lower rates, and a cooling US labor market remain key drivers. 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, technicals, and fundamentals will continue to require close monitoring.

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

A break below the 155 support level and the 50-day EMA would indicate a bearish near-term trend reversal. A sustained fall through the 50-day EMA would expose the 200-day EMA. If breached, 150 would be the next key support level.

Crucially, a sustained fall through the 50-day and 200-day EMAs would reinforce the bearish price outlooks for USD/JPY.