- The yen did not gain strength overnight due to uncertainty about inflation from the Bank of Japan.
- Positive risk could also weaken the yen, although weak demand could help reduce losses.
- The underlying backdrop suggests that the path of least resistance for the yen is to the downside.
The Japanese yen (JPY) edged lower in the Asian session on Friday, with the yen’s feeble recovery from its lowest level against the dollar since August appearing to have stalled. Investors backed off bets that the Bank of Japan would hike interest rates in 2024 after Prime Minister Shigeru Ishiba said in a speech that Japan was not in for another round of inflation. That, along with the upside risk, made the yen a safe haven ahead of Japan’s Oct. 27 election, providing some support for the USD/JPY pair.
Meanwhile, the U.S. dollar (USD) is expected to remain below its highest level in nearly two months on Thursday, providing little meaningful support to the USD/JPY pair. Investors now appear to believe that signs of economic weakness will prompt the Fed to continue cutting interest rates. However, high expectations for U.S. consumer market data on Thursday have ruled out another decision in November, discouraging traders from placing aggressive bets ahead of the U.S. Producer Price Index (PPI).
Daily Summary Market Trend: Yen falls as Bank of Japan further eases expectations
- Expectations that the Bank of Japan will be in no rush to raise interest rates failed to help the yen recover some ground against the dollar from its lowest levels in more than two months on Thursday.
- In addition, political uncertainty and generally positive risks ahead of Japan’s snap election on October 27 will weaken demand for yen and continue to be a driving force for the USD/JPY pair.
- The U.S. Labor Department reported that core consumer prices, which exclude food and energy costs, rose 3.3% annually in September, sending the dollar to its highest level since mid-August.
- Meanwhile, the headline CPI climbed 2.4% in the 12 months through September vs. 2.3% expected. This, however, was lower than the 2.5% in August and also the smallest year-on-year rise since February 2021.
- Separately, the number of Americans applying for unemployment benefits rose by 33,000 in the week ending Oct. 5, to a seasonally adjusted 258,000, in the first signs of weakness in U.S. jobs.
- Investors now believe the Fed will continue to cut interest rates and keep the dollar under protection ahead of the US Producer Price Index (PPI) release on Friday.
Technical Outlook: USD/JPY activity pattern looks positive for bulls, 149.00 level is important
From perspective, a break above the 50-day simple moving average (SMA) for the first time since mid-July and acceptance above the 38.2% Fibonacci retracement level from July-September would be a bearish move for the bulls. Also, the positive appreciation of the oscillators on the daily chart and away from the overbought zone suggest that the path of least resistance for USD/JPY is at the top. Therefore, any further declines will attract new buyers and will be close to the 148.00 level.
The latter should be a significant pivot point and if breached could lead to some selling and pull USD/JPY towards support between 147.35 and 147.00 and 146.50. On the other hand, the 149.00 round seems to be a problem just ahead of the overnight high (around 149.55-149.60). Above this level, the bulls could push back above 150.00 after the mental breakdown. This momentum could continue to the 50% Fibonacci retracement. around 150.75-150.80.
