The overarching setup—one driven by US inflation dynamics, the trajectory of bond yields, and the evolving developments on the Federal Reserve policy—remains ultra-complicated. Recently, there has been a sense of possible long-term bond yields greening their rally because the expectations of rate hikes are continuously being priced out, while Japanese inflation and BoJ rate hike bets further complicate the picture. Traders closely watch if the pair can maintain critical support levels amid the economic data-central bank strategy tug-of-war.
Key Takeaways
Cautious Fed and stable inflation keep US bond yields in check.
Japan's improved inflation and retail sales lift expectations of a possible BoJ rate hike in December.
The technical signals show downside risks building in USD/JPY.
US Inflation and Fed Rate Outlook
With signs of peaking inflation, the Fed has kept a hawkish bias, but markets are pricing in a December pause. Headline and core PCE—the Fed's favorite inflation gauges—are expected to increase by 0.2% and 0.3% m/m, respectively, which would keep the core annualized rate above the Fed's target of 2%. With the US 10-year Treasury yield still very highly correlated with USD/JPY, any surprise in the inflation data could rather quickly shift expectations. Upcoming Treasury auctions, together with consumer spending data, will also play a pivotal role in shaping sentiment.
Short-term rate expectations have also firmed up, pricing fewer rate cuts for 2025 amid a growing conviction in the US economy's resilience. The price being paid for this conviction, however, is long-term yields that are being capped, thus capping USD/JPY's upside potential.
BoJ's Hawkish Turn?
Recent economic data out of Japan has fanned speculation of a hawkish Bank of Japan. The Tokyo Core CPI is expected to rise above the BoJ's 2% goalpost while retail sales are likely to show a 0.7% y/y advance, which would indicate healthy consumer demand. Analysts say these could be pretext for the BoJ to deliver a rate hike this December, which would lift the yen's appeal and weigh on USD/JPY.
Still, despite such domestic pressures, the pair remains largely driven by US bond yields. However, traders should not get too complacent as unexpected BoJ comments or surprises in the inflation and jobs data later in the week may still lead to spikes in volatility.
USD/JPY and Bond Yields
On a broader perspective, the strong correlation of the USD/JPY, having a coefficient of 0.85 for the last month, remains with US Treasury yields, but technical signals indicate a waning bullish momentum. Resistance levels stand at 156.75 and 160.23, but failure to stay above 153.5 will have the pair gunning for support at 151.68 or even 150.90 alongside the 200-day EMA.
Indicators such as RSI and MACD indicate that bearish momentum is gathering. While USD/JPY is still in an uptrend, a penetration of these technical support levels could lead to a sharp decline. Conversely, a continued rise in US yields will push the pair to rechallenge to new highs, given constructive macro data to justify the uptrend.
Technical Analysis
Resistance Levels: 156.75, 160.23
Support Levels: 153.5, 151.68, 150.90
Indicators: RSI (14) at 58 suggests a neutral momentum; MACD signals growing downside risks.
A break below 153.5 will confirm the start of the bearish correction, especially if US bond yields begin to fall simultaneously. For this, traders will take a look at the PCE report and comments by the Fed for clarity, which could, most likely, set the near-term course for the pair.
Conclusion
USD/JPY is at a crossroads, with inflation data and dynamics in bond yields driving near-term moves. The pair still retains a bullish bias, but a combination of ebbing US rate hike expectations and bottoming BoJ rate hike bets could convey momentum. Traders should be prepared to watch key levels of support and resistance, along with the upcoming releases of inflation data and central bank commentary, for effective navigation.
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