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USD/JPY hovers near five-year highs

The greenback weakened notably today, erasing most of Tuesday's gains as traders brought home some profits from the recent rally.

The greenback erased more than half of yesterdayโ€™s gains during the London session, bringing USD/JPY below 116 and retreating from the highest level since January 2017.

Rising US yields have brought the pair sharply higher over the recent weeks as traders are pricing in three rate hikes by the Fed this year. As a result, the two-year yield surged above 0.8% for the first time since March 2020.

US data in focus

From other news, the Decemberโ€™ US Manufacturing PMI dropped more than expected yesterday and came out at 58.7, down from 61.1 previously. Economists had forecast 60.0. Additionally, the prices paid subindex decelerated sharply to 68.2, from 82.4 previously, suggesting inflation pressures in the manufacturing sector might be finally easing.

Later today, the ADP employment report for December is due, and investors expect the US economy to have created 400,000 new jobs, down from 534,000 set in November.

Moreover, the FOMC minutes from the December Fed's meeting will be released, likely confirming the central bank's hawkish stance. As a result, volatility in the financial markets could be elevated after the Minutes.

BoJ remains dovish

Reuters reported that at its next monetary policy meeting on January 17-18, the Bank of Japan (BoJ) will likely make upward revisions to its inflation forecast for 2022-2023 due to rising energy costs, citing sources with knowledge of the matter.

Easing supply constraints and an expected boost from the government's stimulus package may also lead to an upgrade in the BoJ's growth projection for next fiscal year.โ€ The central bank expects the Japanese economy to grow by 2.9% next fiscal year after this year's 3.4% expansion. Additionally, Decemberโ€™s Japanese consumer confidence index was released today, showing a marginal decrease to 39.1 from 39.2 in the previous month.

Technically speaking, the key support now stands at previous cycle highs at 115.50, and it looks like it will be tested pretty soon. If the pair drops below that support, it could be a strong bearish reversal signal, likely bringing the USD back to the 114 region.

On the upside, it appears the next target for bulls will likely be at 118.50, where December 2016/January 2017 highs are. A break above that resistance could quickly send the USD to the psychological 120 threshold.

The pair now seems overbought, possibly resulting in a break below the mentioned support.

Marek is a cryptocurrency enthusiast with several years worth of experience in the industry. He has been working with numerous cryptocurrency and FinTech projects, where his main r...

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