The USD/JPY currency pair has taken a significant downward turn, a shift largely driven by a soft U.S. core PCE inflation report and growing expectations for Federal Reserve rate cuts. As market participants brace for a slew of U.S. labor market data this week, including the highly anticipated non-farm payrolls report, the outlook hinges on the unlikely possibility of a decline in the U.S. unemployment rate. Without such a drop, the USD/JPY seems poised for further declines.
Fed Cuts Driving Market Sentiment
The sudden change in the USD/JPY trend last Friday came as traders digested the dual impact of a new Japanese Prime Minister and signals from the U.S. inflation data that further rate cuts could be imminent. Investors are now factoring in the likelihood of a 50 basis point rate cut from the Fed in November, after the supersized 50-point cut in September. The outcome of this week’s U.S. labor market reports will be crucial in determining whether the Fed follows through with additional cuts.
As of Friday, futures markets have priced in 84.5 basis points of rate cuts across the remaining Federal Open Market Committee (FOMC) meetings for 2024, implying a strong chance of at least one more 50 basis point cut. Markets also anticipate an additional 226.5 basis points of easing through 2025, with rates expected to dip into loose monetary territory by the end of that period.
Learn more about the Federal Reserve’s rate cut outlook.
Correlation Between USD/JPY and U.S. Rates
The typically strong correlation between the USD/JPY and U.S. interest rate differentials has weakened in recent weeks. This is likely due to temporary factors, including quarter-end capital flows and uncertainty regarding Japan’s political landscape. However, with these short-term influences largely resolved, the USD/JPY may soon return to its usual sensitivity to U.S. monetary policy shifts.
Expectations for Federal Reserve rate cuts are likely to regain their influence over the currency pair. This places a spotlight on key U.S. economic indicators, particularly employment data, which will play a decisive role in shaping market expectations for future Fed actions.
Explore U.S.-Japan market correlations.
Upcoming U.S. Labor Data Key for USD/JPY Outlook
The highlight of this week’s U.S. economic calendar is Friday’s non-farm payrolls report, with a focus on the unemployment rate. Forecasts suggest the rate will remain steady at 4.2%. However, any uptick in unemployment could solidify expectations for another 50 basis point cut from the Fed, while a decline in unemployment could temper those expectations. Other labor market data to watch includes the ADP National Employment Report and the Job Openings and Labor Turnover Survey (JOLTS).
Beyond the labor reports, market participants will also be tuning into speeches from Federal Reserve officials. While Fed commentary is important, it is likely to have limited impact ahead of the payrolls report unless officials explicitly signal a shift in policy direction.
Get insights on upcoming U.S. labor market data.
Japan’s Economic Data Less Impactful for USD/JPY
While Japan has a busy economic calendar this week, none of the scheduled releases are expected to have a major impact on USD/JPY. The minutes from the Bank of Japan’s (BOJ) September meeting could generate short-term volatility, but they are unlikely to shift the broader trend in the pair.
For USD/JPY, all eyes remain on U.S. data and its implications for future Fed rate cuts.
Technical Analysis: Bearish Signals Strengthen
Technically, the USD/JPY appears to have entered bearish territory after Friday’s price action. A bearish evening star pattern completed on the daily chart, with the price crashing through two key diagonal supports. The Relative Strength Index (RSI) also broke below its uptrend, signaling further downside momentum.
The next major support levels are 141.75, followed by 139.60. If the pair continues to fall, further downside targets include 138 and 135.38. On the topside, resistance may emerge around 143.20, where the August 16 downtrend intersects. The 50-day moving average, which rejected a bullish attempt last week, also serves as a key resistance point.
Learn more about technical analysis for USD/JPY.
