USD/JPY forecast: dollar strength persists ahead of NFP

The US dollar continues to enjoy broad support, keeping the near-term USD/JPY forecast bullish. The Fed’s hawkish tone, combined with stronger-than economic figures, has kept the greenback in demand, ahead of the monthly jobs report on Friday. Today’s core PCE data and jobless claims have also helped to prolong the dollar’s rally, while the Bank of Japan’s neutral policy tone kept the yen under pressure.

 

Technical USD/JPY forecast: higher highs and higher lows

 

The USD/JPY continues to paint a bullish picture, with the pair creating higher highs and higher lows ever since it bottomed around the long-term 140.00 support area in April. Consequently, the UJ has risen above both its short-term 21-day exponential average and long-term 200-day simple average. These developments point to a bullish USD/JPY forecast from a technical point of view.

 

 

Today saw the USD/JPY break further higher to climb above the psychologically important 150.00 handle. Can it extend its rally to 151.00 and higher?

 

Key support levels to watch now include 150.00 initially, ahead of the 149.55 next, with the latter marking the 200-day average. Below that, 149.20 comes into focus, followed by 148.65 – levels that were formerly resistance.  

 

Core PCE comes in hotter ahead of NFP

 

Resilient data and concerns over sticky core inflation have reinforced the Fed’s cautious stance. Today’s release of core PCE data was slightly above expectations, printing 2.8% vs. 2.7% expected. Meanwhile, jobless claims came in better than expected at 218K vs. 224K eyed, while Q2 employment cost index rose to 0.9% Q/Q, beating expectations. Today’s data come on the back of a stronger GDP figure released the day before, when we also had a better-than-expected ADP private payrolls report.

 

The focus will now shift to Friday’s nonfarm payrolls, which could tilt the scales further on rate expectations. Powell has highlighted the unemployment rate as a critical indicator, so any positive surprises there may solidify the Fed’s current stance.

 

But, expectations point to +106K jobs, with +0.3% m/m weekly earnings, and the unemployment rate is seen at 4.2%. But the lack of leading indicators for this month’s jobs report increases the uncertainty around the release.

 

Bank of Japan raises inflation outlook but warns about growth

 

Across the Pacific, the Bank of Japan kept its policy rate unchanged at 0.5% overnight in a decision that was widely expected. The central bank did send a subtle hawkish message by sharply raising its inflation forecast for FY2025 to 2.7% from 2.2%. The upward revision reflects persistent price pressures, particularly in food and energy, and signals that policymakers are perhaps contemplating further tightening. But that was outweighed by the BOJ acknowledging risks of a broader economic slowdown, which would ultimately take precedence over any short-term inflation spikes when it comes to policy changes. As always, any future rate hikes are expected to be incremental and heavily data-dependent. All told, the meeting was neutral and that has allowed the yen to weaken further.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R