USD/JPY forecast: Payrolls pivotal for bullish bond breakout, yen rally longevity

• US bond breakout drives USD/JPY to six-week lows below 150
• Payrolls data holds the key to yen’s next big move
• Strong jobs could reverse Treasury gains and lift USD/JPY
• Weak data risks accelerating the yen rally toward 147

Overview

A bullish breakout in US long bonds sparked a powerful rally in the Japanese yen, sending USD/JPY tumbling to six-week lows. With major macroeconomic events on the calendar, technicals will combine with fundamentals to determine whether the move sinks, soars or goes sideways in the week ahead.

Bullish bond breakout delivers

The bullish breakout in US 10-year Treasury futures discussed last week happened with a bang last Monday, with news that Donald Trump had nominated Scott Bessant for the treasury secretary position delivering what was arguably the most important event for USD/JPY of the week.

Source: TradingView

You can see the move on the 10-year Treasury note futures chart above, coming on the back of record trading volumes thanks to the timing of the contract roll. The break has since extended, sending the price towards a zone comprising of the 50 and 200-day moving average, along with horizontal resistance at 115’03. Near-term, that may prove difficult to crack given significant risk events ahead.

US yields unwind sharply

Rightfully or wrongly, markets are giving Bessent the benefit of the doubt when it comes to his aspirational goals to deliver 3% GDP growth, a 3% budget deficit and three million extra barrels of US crude oil production by 2028, generating a wave of relief towards the US budget trajectory. That sent Treasury yields sharply lower, especially at the back end of the curve from ten years and beyond.

Source: TradingView

Bessent’s nomination may also have combined with month-end flows and positioning adjustments ahead of major US economic data to deliver a minor increase in Fed rate cut pricing between now and the end of 2025.

If that continues to deliver significantly larger moves in Treasury yields further out the curve, anything that could influence Fed pricing needs to be on the radar for USD/JPY traders given how tight its correlation has been with US 10-year yields over the past month, sitting at 0.91. That’s strong, indicating it’s the US rate outlook that continues to dominate directional moves.

Crescendo of major risk events await

The calendar is stacked with major risk events. Those set to move USD/JPY have been highlighted below, although it needs to be emphasised that labour data sits head and shoulders above everything when it comes to the likely magnitude of movement.

Source: Refintiv

Payrolls will be the main event with a strong outcome likely to spark another unwind in Fed rate cut pricing, pointing to the risk of a reversal in US Treasury yields and USD/JPY. Alternatively, if weak, the yen surge could go into overdrive, like what was seen in early August.

While traders tend to react initially to the payrolls number, seemingly forgetting the large revisions we see on a monthly and annual basis, it’s worth remembering the Fed has a full employment mandate, not a payrolls mandate. If there are mixed messages from the data, it’s the unemployment rate that will likely override when it comes to market interpretation.

Given the importance of the report, it will be Federal Reserve speakers we hear from afterwards that will likely deliver the most impactful messages for traders. It’s no coincidence the busiest day for Fed speak is Friday!

Source: Refinitiv

Even though the Japanese calendar should be regarded as a secondary consideration, the October labour cash earnings report is important as continued strength in wages growth is a prerequisite for helping to sustainably boost domestic inflationary pressures and keep the BOJ on the path towards further rate hikes.

USD/JPY: bearish bias maintained

Source: TradingView

The USD/JPY daily chart looks a mirror image of the 10-year Treasury note futures one above, with a bearish breakout early in the week extending below 150 on Friday, leaving the pair at six-week lows. Momentum indicators continue to generate bearish signals, making the inclination to sell rallies near-term.

If we were to see any squeezes back towards the 200-day moving average, it would create a decent trade setup for those looking to get short, allowing for positions to be established beneath with a stop \ above it or 150.90 for protection.

If the price were unable to climb back above 150, another option would be to sell beneath with a tight stop above for protection. This screens as a lower probability setup with 150 only a psychological big figure, not a proven level despite what you may read elsewhere.

There’s very little visible support evident until 147.20, making that an obvious target for either setup. In between, big figures may stall or slow the move temporarily. If the price were to reverse back above 150.90, the bearish bias would be invalidated, opening the door to potential bullish setups.

Good luck!

-- Written by David Scutt

Follow David on Twitter @scutty