USD/JPY Weekly Outlook: AI earnings could overshadow the Fed and BoJ

• USD/JPY increasingly moves with US yields, Nasdaq and volatility
• US Treasury yields tumble as global tech stocks weaken
• Fed and BoJ decisions face competition from tech earnings
• Bulls defend 156.68, but momentum indicators favour downside.

A sharp midweek unwind in US Treasury yields, driven by deteriorating sentiment towards AI-related investment, was enough to knock USD/JPY out of its narrow trading range between the 50 and 200-day moving averages last week. However, a stabilisation in sentiment towards the back end of the week was enough to reverse part of those moves on Friday, delivering a bullish signal on the daily chart.

Despite interest rate decisions from the Federal Reserve and Bank of Japan this week, along with a smattering of top-tier economic data, you could arguably make the case that earnings updates from AI-related companies, particularly the massive hyperscalers, may be just as influential on USD/JPY's performance in the weeks ahead. Of particular interest will be guidance on AI capital expenditure and commentary on expected payback periods, including when those enormous investments may begin delivering on the hype already priced into markets.

One trade increasingly driving everything

As we highlighted in a separate analysis piece last week, sentiment towards AI-related investments is becoming a core driver of broader market movements, with traders seemingly adopting it as a proxy for the US growth outlook, influencing Treasury yields and, to a lesser extent, the US dollar.

Source: LSEG

The relationship has become increasingly strong as we've moved through October, with the correlation between USD/JPY and US 10-year Treasury yields flirting with +0.97 over five sessions, with similar readings for Nasdaq 100 futures and an equally strong inverse relationship with VIX futures.

While you need to be careful when assessing five-session correlations, you can see those relationships have also been evident over 10 and 20-session windows. The message is that markets which were previously fixated on crude oil movements now seem to be taking their cues from AI sentiment, suggesting it will be a key focal point for traders in the week ahead.

AI jitters drive a sharp Treasury rally

The deterioration in sentiment towards AI-related investments has coincided with a sharp rollover in US Treasury yields, mirroring the weakness seen across technology stocks and indices globally.

Source: LSEG

Over the past fortnight, US two-year Treasury yields have fallen 10.9 basis points, compared with 21.4 basis points for five-year yields and 25.6 basis points for the 10-year. The declines in the latter two tenors rank among the largest 2% of comparable two-week moves over the past year, underlining just how significant the shift has been.

The greater declines further along the curve have also seen the spread between two and 10-year Treasury yields flatten by 14.7 basis points, consistent with markets reassessing the US nominal growth outlook as doubts surrounding the returns on AI investment weigh on global technology shares. While it's not the only influence on yields, it has been the most prominent factor seen of late.

Hawkish Fed pricing unwinds fast

The sharp decline in US Treasury yields has also been mirrored at the immediate front end of the US interest rate curve, with traders substantially scaling back the amount of rate hikes expected from the Fed over the coming year. According to our fed funds futures model, cumulative tightening priced by the end of next year has fallen from 100.9 basis points at the time of the September Fed meeting to just 66.1 basis points now, an unwind of 34.8 basis points.

Source: TradingView

For this week's Fed decision, just 3.1 basis points of tightening is priced, equivalent to roughly a 12% probability of a 25 basis point hike. It really comes across as a placeholder meeting more than anything else, with markets now of the view that the Fed is likely to hike at its subsequent meeting in December, although confidence in that view has waned along the way.

With no new economic forecasts released at this meeting, the focus will be on any changes to the accompanying statement, the voting split, particularly whether there are dissenters in favour of a hike, and commentary from Fed Chair Kevin Warsh during his subsequent press conference.

BOJ expected to hold, December hike favoured

Like the Fed, the Bank of Japan is widely expected to leave interest rates unchanged at its meeting on Friday, with markets favouring another 25 basis point hike in December. However, the probability of that outcome has also edged lower over recent weeks.

Unlike the Fed, the BoJ will release updated economic and inflation projections in its quarterly Outlook Report, which could provide important clues about the path of interest rates moving forward. Any changes in the accompanying policy statement, the voting split and commentary from Governor Ueda during his press conference will be the main areas of interest for traders when assessing whether the BoJ is still on track to hike in December.

AI earnings could overshadow central bank decisions

As the accompanying calendar shows, there's a raft of major tech earnings due this week, including updates from some of the world's largest hyperscalers. Of particular interest will be guidance on AI capital expenditure and whether the enormous sums being committed to the technology can deliver the returns investors are expecting.

Source: TradingView

As we saw following Meta's earnings call last week, concerns are growing about the ability to continue funding the massive capex rollout, along with uncertainty over not only when returns on those investments will materialise, but whether they will materialise at all.

In the absence of a major surprise from either the Fed or BoJ, these earnings updates could arguably be the more important market events for USD/JPY this week, which really says something about how one-dimensional markets feel right now.

Economic data risks taking a back seat

There's also a smattering of important economic data due this week, although whether it will have much influence on USD/JPY is another question.

Source: TradingView

In Japan, the BoJ's underlying inflation measures for September and Tokyo CPI for October, on the surface, seem like incredibly important releases. However, when September's Tokyo CPI report came in hot, markets barely blinked an eyelid, raising questions about whether anything on the Japanese economic calendar will really move the dial this week.

You could arguably make the same case for the US calendar, where the advance estimate of Q3 GDP on Thursday, along with personal income and spending figures, look to be the highlights. Even the core PCE deflator, still the Fed's preferred inflation measure, has struggled to generate meaningful market volatility over recent years, suggesting economic data may once again take a back seat to broader market sentiment.

USD/JPY technicals

Source: TradingView

As you can see on the USD/JPY chart, the abrupt decline in US Treasury yields midweek broke the stalemate between the 50 and 200-day moving averages that we'd seen over the past two weeks, sending the pair down to anchoring support at 156.68 on Friday.

As we saw on several occasions in late September, bulls stepped in to defend the level, driving the pair back above it into the close and delivering a dragonfly doji. While it doesn't come after a particularly pronounced downtrend, the pattern, like those seen beforehand, suggests bulls are lying in wait beneath 156.68.

That makes 156.68 the immediate support level beneath where the pair now trades, followed by 156.05, where the decline stalled on Friday. Below that, a more pronounced support zone comes into view between 155.50 and 155.00. Given what we saw last week, it would likely require either a very dovish surprise from the Fed, a very hawkish surprise from the BoJ, or another sharp deterioration in AI sentiment to see those levels tested. If that occurs, 154.50 and 152.90 are the next downside levels of note.

Having managed to reclaim 156.68, the focal point overhead is now the 50-day moving average at 157.58, followed by the 200-day moving average and resistance at 159.00.

While Friday delivered a bullish signal, the oscillators continue to warn bulls against getting carried away. RSI (14) has flipped beneath the neutral 50 level, while MACD has staged a bearish crossover and is on the cusp of turning negative. That suggests momentum is shifting to the downside, although the signal is not yet definitive.