• USD/JPY retreats below 157.00 at the end of the week.
• Traders dumped the dollar after gentle PCE data.
• The Fed’s hawkish outlook may limit the pair’s negative outlook.

USD/JPY rebounded from its highest levels since July, retreating to 156.50 after the release of US personal consumption expenditure (PCE) data. Softer inflation rates, combined with insights from the Federal Reserve’s recent interest rate decision, have tempered the US dollar’s bullish momentum. Meanwhile, the pair’s technical indicators signal caution despite maintaining an overall bullish sentiment.

The latest PCE data from the Bureau of Labor Statistics (BLS) revealed feeble price pressures in November. Prices of goods increased slightly by less than 0.1%, and prices of services by 0.2%. Food and energy prices also saw a slight boost of 0.2%. Excluding these volatile components, Core PCE rose 0.1% month-over-month and 2.8% year-over-year, below market expectations.

The Fed’s expected 25-basis-point rate cut on Wednesday brought its policy rate down to a range of 4.25%-4.50%, a level last seen in December 2022. While the decision was in line with expectations, Fed Chairman Jerome’s restrained comment Powell’s comments on the future easing of monetary policy weakened hopes for aggressive interest rate cuts in the near future. Since then, softer inflation data has provided some reassurance, but uncertainty over the central bank’s next moves remains uncertain. The next event will be December labor market data, which will be published in early January next year.

USD/JPY technical review

USD/JPY retreat to 156.50 indicates a cooling of bullish momentum, with key technical indicators signaling mixed conditions. The Relative Strength Index (RSI) was rejected at the overbought threshold of 70, indicating a potential exhaustion of the uptrend. Meanwhile, the moving average convergence divergence (MACD) histogram continues to show rising green bars, reflecting continued bullish momentum.

We see immediate support at 156.00, with a break below that level potentially exposing 155.50 as the next key downside level. On the other hand, resistance remains at 157.00, with a decisive break above this level required to retest recent highs. While the pair remains in a broader uptrend, a period of consolidation may be necessary before another directional move.