The pair registered an eye watering rally for the most part of the previous year, as the Bank of Japan maintained an ultra-loose setting, whereas its US counterpart implemented its most aggressive tightening cycle in decades.
However, the Federal Reserve downshifted in December, to a 50 basis points interest rate hike and markets don't believe it will raise them by as much as its projections suggest. This works against the USDollar and the pair runs its third straight losing month. CME's Fed Watch Tool prices-in another slowdown in the pace of tightening, with a smaller 0.25% increase  next week and we have not seen any meaningful pushback against this expectation, by Fed officials.
The Bank of Japan meanwhile, surprised markets last month with hawkish tweak to its yield curve control, doubling the target range to 0.5% for the 10-year bond yield . This opens the door to policy normalization, but an imminent and straightforward shift does not seem very likely. The central bank disappointed some market participants last week, as it opted not to change the yield curve further. 
This helped USD/JPY to a two-day advance and a strong start to the week, which could allow the greenback to look towards the critical 132.40-133.05 region, which contains the EMA200 and the 23.6% Fibonacci of the 2022 high/2023 low slump. Although, a strong catalyst would be required for challenging this level, taking it out could accelerate a recovery towards 133.67.
On the other hand, the rebound from last week's eight-month lows looks frivolous and a look at the daily chart does not leave much room for optimism, as the DMA50 has crossed below the slower DMA200. This Death Cross formation is often viewed a precursor to further weakness, but more time is needed to gauge its potential. In any case, risk is clearly on the downside and USD/JPY vulnerable to lower lows (127.21).
The pair's trajectory can be impacted by the incoming data from the US over the following days. These include the PCE inflation update, which Fed officials will take into account ahead of next week's policy decision.
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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