Divergent BoJ-Fed expectations support the outlook for further losses

• USD/JPY is down for a third day in a row and is down to a one-month low on Thursday.
• Divergent BoJ-Fed policy expectations are proving to be a key factor exerting pressure.
• A softer risk tone supports the safe JPY and contributes to the continued decline.

USD/JPY remains under some selling pressure for the third day in a row and is down to 143.00, or a one-month low during Thursday’s European session. The Japanese yen (JPY) got a boost after the release of domestic data that showed inflation-adjusted wages in the world’s fourth-largest economy rose for a second month in a row in July. In addition, Hajime Takata, a member of the Board of Governors of the Bank of Japan (BoJ), said that if the economy and prices move in line with the forecast, the central bank will adjust the policy rate in several stages. This comes on top of dovish remarks by BoJ Governor Kazuo Ueda last month and reaffirms expectations that the central bank will raise interest rates again by the end of this year.

This marks a big divergence from growing bets for more interest rate cuts by the Federal Reserve (Fed), supported by signs of softening in the US labor market. The Job Openings and Labor Turnover Survey (JOLTS) released Wednesday by the U.S. Bureau of Labor Statistics indicated that job openings fell to 7.673 million in July, the lowest level since January 2021. May much, the figure for June was revised to 7,910. million versus 8.184 million previously reported. Additionally, the Fed’s Beige Book showed that nine out of 12 regional districts reported flat or declining economic activity in August. That, along with comments from Fed officials, raises expectations that the U.S. central bank will cut borrowing costs by 50 basis points in September.

Atlanta Federal Reserve President Raphael Bostic said price pressures are easing quickly and the U.S. central bank does not need to maintain a tight policy stance for too long. Separately, San Francisco Fed President Mary Daly said the central bank needs to cut interest rates to keep the labor market healthy, but it now depends on incoming data to determine how much. The favorable outlook drags the interest-sensitive two-year US Treasury yield to its lowest since May 2023 and the benchmark 10-year US Treasury yield to its lowest since July 2023. This keeps the US dollar (USD) on defensive, which contributes to the tone provided around the USD/JPY pair and supports the prospects for a further depreciation move.

Meanwhile, the disappointing US labor market report is raising concerns about a slowdown in the US economy and tempering investors’ appetite for riskier assets. This is evident from a generally weaker tone around equity markets, which should benefit the JPY’s relatively safe status and validate the short-term negative outlook for the USD/JPY pair. Traders now look to Thursday’s US economic record – with the release of the ADP Private Sector Employment report, weekly initial jobless claims and ISM services PMI. However, the focus remains on the monthly US employment details or Friday’s Nonfarm Payrolls (NFP) report, which will boost USD demand and provide a significant boost to the currency pair.

Technical perspectives

From a technical perspective, the overnight breakdown to the 144.00 mark was seen as a new trigger for bear traders. Furthermore, the oscillators on the daily chart remain deep in negative territory and are still far from oversold, suggesting that the path of least resistance for the USD/JPY pair remains to the downside. Acceptance below the 143.00 round figure will reaffirm the downtrend and pull spot prices further towards the 142.30-142.25 intermediate support en route to the 142.00 mark and 141.70-141.65 region, or a seven-month low reached in August.

On the other hand, any significant recovery beyond the 144.00 threshold is likely to attract fresh sellers and remain limited near the 144.50 supply zone. The latter should act as a key pivot which, if decisively removed, could trigger a short-covering rally and lift USD/JPY beyond the psychological 145.00 threshold towards the next hurdle relevant from near the 145.60 area. Momentum could extend further towards the 146.00 round figure en route to the 146.35-146.40 region.

USD/JPY 4 hour chart