USD/JPY forecast undermined by sudden Risk OFF trade

It has been a volatile week in financial markets. At the time of writing, the Nasdaq was down over 500 points while the USD/JPY was off by 125 pips on the day and counting. Bonds, which had dropped yesterday, were higher across the board, sending their yields down.  Signs of risk off were also evident in pairs such as the AUD/USD which, despite the weaker US dollar, was 0.6% worse off on the day. Cryptos also lost a big chunk of their gains made the day before, while WTI crude oil fell below $63 to a new weekly low. Gold, which has been trading like a risk than have asset lately, couldn’t hold above the $4K level as it gave up its earlier gains. The USD/JPY forecast is turning negative, but we still need to see a more decisive breakdown to turn tactically bearish.

 

Analysis: why is it risk off all of a sudden?

 

It looks like investors have been spooked by fresh signs of a cooling US labour market, which sent investors into defensive mode. Challenger counted over 153,000 job cuts, mostly in tech and warehousing. Now filling the gap left by the federal shutdown, private data such as this continues to cause big moves. Yesterday, the ADP payrolls report had helped soothe sentiment, but now money markets have been pushed to increase the probability of a December Fed rate cut. Yet, equities weren’t buying this optimism. They fell alongside everything else. It goes to show it is not always about rate cut bets and reality is starting to bite. Frankly, the market needed this reality check. After months of AI-fuelled exuberance, traders are rediscovering that fundamentals still matter.

USD/JPY forecast: Could it be heading back to 150?

 

So, the Fed may cut again, but slowing growth and sticky inflation make for an uneasy mix. When investors start flocking to the yen, which is considered one of the ultimate low-yield refuge, it’s clear sentiment has turned sour. Wall Street’s soft landing story is looking increasingly fragile, with recession alarm bells ringing. If yields fall further, then we could see the USD/JPY drop towards 150.00 again in the coming days.

 

 

Standing on the way is support at 153.00 on the USD/JPY chart, which was being tested at the time of writing. A potential close below it could pave the way for a drop towards 152.00 next, below which there is not a lot of support until 151.00 and then 150.00. On the upside, 154.00, marking the trend line is the most important level to watch.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R