Markets Peel Back Hopes for BoJ Policy Change

USD/JPY analysis and issues

• Weak economic indicators in Japan have dampened optimism about the Bank of Japan’s policy change.
• The Fed says it will keep interest rates at current levels, but will inflation push up NFP and make it more hawkish?
• Key support zones under threat.

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Basic background of the Japanese yen

The Japanese yen ended the week on a volatile note, pushed and pushed all the way from Asian trading to the much-awaited Non-Farm Payrolls (NFP) report. Japan’s GDP was significantly lower than expected, falling into negative territory compared to the previous quarter, raising concerns about a future recession. Therefore, despite high levels of inflation, the Bank of Japan (BOJ) may become more cautious in tightening monetary policy.

I have seen Bank of Japan Governor Ueda hint at a policy shift, but I don’t expect anything major to happen at the December meeting without easing markets. Reliance on data is more important than ever for Japan’s central bank, as solid additional support for inflation and labor data will be needed to encourage the BOJ to change its current stance. Short-term money markets are pricing in interest rate hikes around September to October 2024 (see table below), which complements my expectation that there will be no dramatic changes yet.

Bank of Japan interest rate probability

Source: Refinitiv

With no Japan-specific data scheduled for next week (see economic calendar below), the focus will be on the US. Following the upside surprise from the NFP report on all indicators, the dollar could further strengthen its dominance if inflation beats expectations. That said, the Fed is likely to keep interest rates on hold, but this could be combined with Fed Chairman Jerome Powell’s hawkish rhetoric to maintain a restrictive monetary policy environment. US PPI and retail sales will round out the week’s high-impact data ahead of the Bank of Japan’s interest rate announcement next week.

USD/JPY Economic Calendar (GMT +02:00)

sauce: DailyFX Economic Calendar

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Technical analysis of USD/JPY

USD/JPY daily chart

chart creator Warren BenketasI.G.

The daily USD/JPY price action above shows that the bears are trying to break out of the long-term channel support zone. Support was found near the 200-day moving average (blue) as the Relative Strength Index (RSI) entered oversold territory. Weekly closing price of around channel support/145.00 The psychological handle does not support a downside bias and could cause a pullback in the USD.

Main resistance levels:

• 148.52
• 147.37
• Channel support
• 145.00

Main support levels:

IG client sentiment: pros and cons

IGCS shows retail traders are currently showing net profits short In USD/JPY, 68% Number of traders currently holding short positions (as of this writing).

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Contact and follow Warrenon on Twitter:@Wenketas