USD/JPY flirts with daily low after US ADP, remains above 137.00

• USD/JPY pulls back from yearly highs reached earlier this Wednesday.
• The upbeat US ADP report fails to impress the bulls or provide fresh momentum.
• The divergence between Fed and BOJ policies should act as a tailwind and help limit losses.

The pair USD/JPY it fails to capitalize on its intra-day positive move beyond the 200-day SMA and pulls back from the 138.00 area, or its highest level since mid-December touched earlier this Wednesday. However, the price manages to stay above 137.00 during the American session and they react little to the US macroeconomic data.

The US dollar (USD) remains near a multi-month high following the release of the better-than-expected US ADP report, which, in turn, is seen as a key factor acting as a tailwind for the USD/JPY pair. In fact, Automatic Data Processing (ADP) reported that US private sector employers added 242,000 jobs in February, a sharp increase from the previous month’s revised reading of 119,000 (109,000 originally estimated). The data points to underlying strength in the US labor market and may also have raised expectations for Friday’s official employment report, popularly known as NFP.

Markets are now pricing in a higher probability of a 50 basis point hike at the March FOMC meeting and bets were boosted by hawkish comments from Fed Chairman Jerome Powell. This continues to support the USD, although a combination of factors is holding off any significant rally in the USD/JPY pair. A modest pullback in US Treasury yields is holding back USD bulls from making further bets. Apart from this, a softer risk tone – amid looming recessionary risks – benefits the safe haven of the Japanese yen and helps limit rallies in major currencies.

However, the fundamental background continues to support prospects for an extension of the recent USD/JPY bullish trajectory seen over the past month or so. Investors seem convinced that the BOJ will maintain the ultra-loose monetary policy. It is worth mentioning that incoming BoJ Governor Kazuo Ueda stressed last week the need to maintain ultra-loose policy to support the fragile economy. This marks a large divergence from the Fed’s hawkish stance and validates the near-term positive outlook for the pair.

Market participants are now looking forward to the second day of Jerome Powell’s testimony before the US Congress, which, along with US bond yields, will influence USD dynamics. Beyond this, broader risk sentiment could further contribute to short-term trading opportunities around the USD/JPY pair. Next, attention will turn to the BOJ’s monetary policy meeting and the US monthly jobs data release on Friday, which will help determine the next leg of a directional move for the pair.

Technical levels to follow