- Expectations of further tightening of the Bank of Japan's monetary policy continue to support the strength of the Japanese yen against other major currencies, especially against the US dollar.
- According to licensed trading platforms, the USD/JPY pair has plunged to the support level of 141.75, near its lowest level in 2024, and is stabilizing around the 142.15 level at the beginning of this important week, which is titled with US inflation figures that may define the features of the US Federal Reserve's decisions.
According to forex market trading, for two years since the US Federal Reserve began its aggressive battle against inflation, equity traders have been glued to their screens on the days the US Consumer Price Index was announced. Meanwhile, things should be different next Wednesday when the latest US CPI data is released. But why?
Because with inflation falling toward the Fed’s target and the central bank poised to cut interest rates, the reading is less important to the stock market. Instead, it’s all about the weak employment outlook and whether the central bank can avoid a sharp decline. The S&P 500 is coming off its worst week since the collapse of Silicon Valley Bank in March 2023 as big tech stocks tumbled, led by a 14% drop in Nvidia Corp. shares. Volatility is back, with the Cboe Volatility Index, or VIX, rising from 15 on Aug. 30 to a high of nearly 24 on Sept. 6.
At the same time, options traders are betting on more of that, but less than the market expected, on CPI Day. As of Friday morning, they were pricing in a 0.85% move in either direction for the S&P 500 on Wednesday. If that happens, it would be among the smallest CPI Day moves this year, according to data compiled by Piper Sandler.
On the other hand, traders were pricing in a 1.1% implied move for the S&P 500 ahead of Friday’s weak U.S. jobs report. That was among the highest this year in absolute terms and 83% above the average implied daily move in 2024, according to data compiled by Susquehanna International Group. Moreover, the benchmark stock index managed to beat expectations, falling 1.7%.
Overall and fundamentally, market thinking has now shifted as US interest rate cuts have become a foregone conclusion, but the strength of the economy seems less secure. Federal Reserve Chairman Jerome Powell virtually declared victory in the battle against inflation during his comments at the central bank's symposium in Jackson Hole, Wyoming, on August 23. Since then, more policymakers such as New York Fed President John Williams, Chicago Fed President Austan Goolsbee. Also, Fed Governor Christopher Waller have indicated that cuts are necessary - but the size is up for debate.
Now the Fed is turning to the other side of its dual mandate, and maximizing employment. The US jobs report released on Friday showed that non-farm payrolls rose by 142,000 jobs last month, putting the three-month average at its lowest level since mid-2020, according to the Bureau of Labor Statistics. Looking ahead to the Fed's interest rate decision on September 18, swaps contracts are fully pricing in at least a quarter-point cut. At the same time, implied moves ahead of major employment-related macro events are gaining momentum, and with equity volatility measures like the VIX remaining elevated as traders hedge for more downside risks to stocks, according to data compiled by UBS AG Group.
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USD/JPY Technical Analysis and Expectations Today
Friday’s pullback pushed USD/JPY below its 100-hour moving average. As a result, the pair is back near oversold levels on the 14-hour Relative Strength Index. In the short term, based on the hourly chart, USD/JPY is trading in a descending channel formation. Also, the 14-hour RSI has declined to approach oversold levels. Therefore, bears will seek to extend the current decline towards 140.44 or lower to the support at 138.52. On the other hand, bulls will seek to pounce on the rebounds at around 143.87 or higher at the resistance at 145.79. In the long term, based on the daily chart, USD/JPY is trading in a descending channel formation. The 14-day RSI also supports a long-term bearish bias as it approaches oversold levels. Therefore, bears will target long-term gains at around 136.27 or lower at the support at 129.66. On the other hand, bulls will seek to pounce on gains at around 149.07 or higher at the resistance at 155.40.
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