During Thursday’s trading session, the USD/JPY pair initially declined to 140.25 but later recovered to 141.50. Dovish sentiments regarding the Federal Reserve (Fed) prompted a market sell-off of the US Dollar, aggravated by disappointing US Jobless Claims that rose in the third week of December, causing a downward pull on the USD/JPY. However, a recovery in US yields during the American session provided some support to the Greenback. Attention is now turned to next week, with the anticipation of additional key labour market data releases from the US.

In the Fed’s final 2023 meeting, there was acknowledgment of an inflation deceleration, reinforcing the expectation of no rate increases in 2024. The Summary of Economic Projections (SEP) revealed that Federal Open Market Committee (FOMC) members forecast 75 basis points of easing, leading to a widespread sell-off of the USD. Market expectations now include potential rate reductions in both March and May. This dovish sentiment gained further momentum from the recent Personal Consumption Expenditures (PCE) data for November, the Fed’s preferred inflation gauge, which came in lower than anticipated. The demonstration of decelerating inflation has consequently weakened the US Dollar.

Simultaneously, US Treasury yields, having found support at multi-month lows, experienced a recovery. The 2-year rate stands at 4.28%, and both the 5-year and 10-year yields are at 3.85%. These upward movements in yields aided the USD/JPY pair in trimming its losses.

Looking ahead to next week, the US is scheduled to release crucial labour market statistics, including the Nonfarm Payrolls report, Average Hourly Earnings data, and the Unemployment rate. These figures will be closely monitored as key indicators of the nation’s economic health. Any further evidence of economic cooling may contribute to additional downside pressure on the USD/JPY pair.