Await Fed Chairman Powell’s speech before the next stage

• USD/JP meets fresh supply on Friday and is pressured by a combination of factors.
• The Fed-BoJ policy divergence, along with a softer risk tone, supports the safe-haven JPY.
• Traders look to Fed Chairman Jerome Powell’s speech for signs of a rate cut and fresh impetus.

USD/JPY is under renewed selling pressure on Friday and is reversing some of the modest overnight gains, led by a nice recovery in the US dollar (USD) from YTD lows. However, spot prices managed to hold above the weekly low hit on Wednesday and remain capped in a multi-day range as traders choose to wait on the sidelines ahead of a crucial speech by Federal Reserve (Fed) Chairman Jerome Powell later today. . Powell’s comments at the Jackson Hole Symposium will be scrutinized for clues about the US central bank’s rate cut trajectory, which will influence the price dynamics of the US dollar (USD) and determine the next step of a directional move for the currency pair. Meanwhile, expectations of an imminent start to the Fed’s policy easing cycle continue to act as a headwind for the dollar and appear to be weighing on the currency pair.

According to CME Group’s Fedwatch tool, investors are confident the US central bank will cut borrowing costs by 25 basis points (bps) and are also weighing the possibility of a rate cut move of 50 basis points higher than normal. The stakes were raised by the annual benchmark analysis of employment data released on Wednesday, which showed that US employers added 818,000 fewer jobs than they reported in the year to March. In addition, the minutes of the July 30-31 FOMC meeting showed that a growing number of policymakers supported the case for a rate cut next month amid progress in reducing inflation. In addition, the US Labor Department (DoL) reported on Thursday that initial jobless claims rose to a seasonally adjusted 232,000 in the week ended August 17, up from 228,000 previously, indicating a tightening of the labor market.

Meanwhile, S&P Global’s US composite PMI showed US private sector business activity continued to expand at a healthy pace and sales price inflation eased to near the pre-pandemic average. Further details of the report indicated that the indicator for the services sector unexpectedly ticked higher, although it was largely offset by the fact that business activity in the US manufacturing sector fell at the fastest pace this year. That, in turn, revived fears that the world’s largest economy is at risk of a slowdown and dampened investor appetite for riskier assets, driving some safe-haven flows to the Japanese yen (JPY) and contributing to the decline in the USD/JPY pair. The JPY is further supported by dovish remarks from Bank of Japan Governor Kazuo Ueda, signaling a rate hike if inflation stays on track to hit the 2% target.

Speaking during his first appearance in Japan’s parliament, Ueda said recent market volatility – driven by worries about a US recession – would not derail the BoJ’s long-term rate hike plan. This marks a big divergence from the Fed’s dovish outlook, which in turn suggests that the path of least resistance for the USD/JPY pair is to the downside.

Technical perspectives

From a technical perspective, any further weakness is likely to find some support near the psychological 145.00 mark ahead of the weekly low around the 144.45 region reached on Wednesday. Some subsequent selling will reaffirm the negative outlook and cause aggressive selling. With the oscillators on the daily chart remaining deep in negative territory and still far from oversold, the USD/JPY pair could then accelerate the decline towards the 144.00 round figure. The downward trajectory could eventually pull spot prices to the intermediate support of 143.40 en route to the 143.00 mark.

On the other hand, any strength beyond the 146.00 round figure could continue to attract fresh sellers and remain capped near the 146.50-146.55 supply zone. Sustained strength beyond, however, could trigger a short-covering rally and lift USD/JPY beyond the 147.00 threshold towards the next relevant hurdle near the 147.35-147.40 region. Some further buying could affect the downside outlook and pave the way for a move towards the recovery of the 148.00 level.

USD/JPY 4 hour chart