USD/JPY forecast: US dollar remains on firm footing despite softening a tad

The USD/JPY fell as the yen rallied following the BoJ’s press conference and as haven demand boosted the appeal of the JPY with stocks taking a plunge ahead of more tech earnings tonight from Apple and Amazon. But with a key measure of US inflation and consumer spending both rising more than expected, adding to the other signs of an economy proving more resilient than the Fed and others had expected, and not to mention the rising probability of the dollar-positive Trump gaining a lead in the polls, the greenback is likely to remain on the front-foot. Thus, the near-term USD/JPY forecast is still bullish, barring a major risk-off event that could support yen’s haven appeal. Will the USD/JPY rebound from around the key 151.20-152.00 support area?

US data keeps the Fed on track to cut rates further next week

Today’s release of US data pointed to a goldilocks scenario, as it appears that the labour market and economy remain in a decent shape, with inflation pressures easing. This environment gives the Federal Reserve leeway to continue gradually lowering interest rates in the months ahead, rather than cutting aggressively as had been expected a few months ago. It must be noted that this scenario has been mostly priced in, but should we see further strength in data such as the official jobs report tomorrow, it could even raise question marks about a December rate cut, which seemed almost certain a few weeks back with some even suggesting that it should be a 50-bps cut.

Starting with the labour market, initial jobless claims fell to 216,000 but the employment cost index grew only 0.8% q/q (vs. 0.9% expected), marking the weakest rise since mid-2021. This cooling in employment costs is crucial for the Fed, as it indicates subsiding inflationary pressures and a trend towards pre-pandemic labour norms.

Meanwhile, the Fed’s preferred inflation gauge, the core PCE deflator, came in around the expected figure of 0.3% m/m or 2.7% y/y for September.  This was the largest monthly rise since April and the uptick suggests the Fed may consider a more cautious approach to future interest rate cuts.

These data releases follow a slightly weaker GDP estimate from the day before, with the 2.8% growth driven by consumer resilience, but we also saw a much bigger than expected ADP private payrolls report, too.

This week’s overall mixed data releases have alleviated some of the upward pressure on the US dollar, but with the yields continued to rise and the presidential election now just days away, the greenback remains on track to potentially head further higher.

USD/JPY forecast: BoJ keeps policy unchanged in unanimous decision

Overnight, the Bank of Japan (BoJ) opted to hold its target rate steady at 0.25%, a unanimous decision from policymakers. Governor Kazuo Ueda’s comments, however, leaned more hawkish than anticipated. While he didn’t explicitly signal a rate hike or rule out the possibility for December, his tone suggested openness to future hikes, provided the inflation outlook holds steady. Ueda’s outlook on growth and inflation was also notably more optimistic than in the previous meeting, reinforcing the BoJ's stance on continuing rate increases if inflation trends align with expectations.

However, with the Japanese Prime Minister recently calling for rates to remain low, there is increased uncertainty about whether the BoJ will hike interest rates again in the near-term.  This should keep the yen under pressure, providing a positive backdrop for the USD/JPY forecast. A lot will now depend on the path of inflation in Japan, so do keep an eye on key data releases from Japan in the coming weeks.

USD/JPY technical analysis

Source: TradingView.com

The technical USD/JPY forecast remains bullish until the charts tell us otherwise. At the time of writing, this pair was still holding around key support circa 151.50 – 152.00 at the time of writing. Here, prior support and resistance meets the 200-day average. For as long as don’t see a daily close below this area, the path of least resistance is likely to remain to the upside. However, a decisive break below here could expose the 150.00 handle for a retest. In terms of resistance levels to watch, the 61.8% Fibonacci retracement against last year’s high comes in at 153.40 and this level has been a tough nut to crack in the last few days. Above here, the next bullish target would be the physiologically important 155.00 level.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R