The Japanese yen was the strongest currency in the first half of Tuesday’s session, making good ground against the pound and commodity dollars, and even against the US dollar, with the latter rising against almost all other major currencies. Risk appetite was noticeably weak with European indices and US futures, as well as cryptocurrencies, crude oil and copper all falling. For the USD/JPY forecast, traders are largely in a “wait-and-see” mode ahead of the ADP employment report, with official government data being delayed due to the ongoing shutdown. After Jerome Powell’s cautious tone last Wednesday, markets have spent the past few sessions reassessing just how likely a December Fed rate cut really is. There’s still around 15-16 basis points of easing priced in, but the recent hawkish repricing shows investors aren’t as confident as they once were. That’s part of the reason why the USD/JPY had climbed above 154.00 handle. But with risks of FX intervention increasing, and equity markets wobbling a little, the upside could be limited for the USD/JPY from here on.
Will the dollar resume lower?
Since bottoming in September, the US dollar index hasn’t shown too much vulnerability generally speaking. But that could change as I don’t think the weaker dollar narrative is over just by what Powell said last week. More recent comments from Fed officials have been noticeably less decisive. Dovish Fed official Lisa Cook called December a “live meeting,” while Mary Daly insists the FOMC should “keep an open mind.” In short, the central bank is backing away from any preset path but unless data shows a significant improvement in labour market, I still think a December cut is on the way, which should weigh on the dollar.
Complicating matters is the US government shutdown which is disrupting the data calendar. With fewer releases to anchor expectations, markets are likely to latch onto whatever numbers they can get their hands on. Tomorrow’s ADP report could easily move the dial and impact the near-term USD/JPY forecast.
Risk off and FX intervention from Japan
As for today’s relatively sharp drop in USD/JPY, there are two major factors at play. First, it is the risk-off tone hurting stocks and other risk assets, which is driving haven flows into Japanese yen. On top of this, it appears Tokyo has been talking tough again. Japan’s finance minister is back to verbal intervention. Given how heavily shorted the yen has been, it doesn’t take much to spark a rapid drop in JPY pairs, and that’s exactly what we’re seeing today.
Technical USD/JPY forecast and key levels to watch
The USD/JPY forecast has taken a bit of technical hit after failing to hold the break above its bearish trend line that has been in place since July 2024. But at the time of writing, it was testing short-term support around 153.05-153.30 area, which was previously resistance. Can it bounce there, or will this area give way now in light of the risk off tone? What happens here could determine the near-term direction for this pair. A break down could expose 152.00, 151.00 and 150.00 support levels for the bears to target. But if we go above the trend line again then 155.00 could be the next stop.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
