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USD/JPY outlook: Traders look ahead to Powell speech, and inflation and jobs data

By Daniela Hathorn

13:47, 30 November 2022

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USD/JPY
USD/JPY
130.042 USD
0.191 +0.150%

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Yen notes
Yen notes - source: getty images

USD/JPY has been able to maintain its bearish tilt but its fast-paced priced action is likely to remain. 

The pair is currently hovering around the 138.50 mark after reaching a high of 142.25 last week on the back of a dollar rebound. We know that it has been one of the most sensitive pairs to sentiment changes over the last month and there are plenty of opportunities for that to continue this week.

 

Key events to watch 

 

This afternoon (6.30 pm UK time) Jerome Powell will take the stage at a Brookings Institution event where he is expected to talk about the outlook for the US economy and the labour market. Investors are likely to be keeping an eye out for any clues about when the Federal Reserve will start slowing down the pace of its rate hikes. Given his press conference after the November meeting, I struggle to see Powell giving in so easily to dovish hopefuls after just one month of negative economic data, but the minutes from that meeting suggested his hawkish stance may not be the majority, which gave risk sentiment a boost.

But regardless of Powell’s inclination at the event this afternoon, there is more crucial data to be released this week. In fact, even before Powell takes the stage we will see the release of the ADP employment change, expected to come in below the previous month’s reading (200k vs 239k). In all honesty, the ADP data hasn’t been a very good predictor of NFP data in the past, but nonetheless, markets will pay some attention. 

We will also have the JOLTS job openings and pending home sales data out at 3 pm UK time. I suspect Powell will reiterate that the jobs market remains strong despite the small rise in unemployment in October and he will want to see another reading before making any policy changes.

And that will be the case because on Friday we will see the November NFP and unemployment reading, but before that, on Thursday we will get the updated PCE data, the Fed’s preferred measure of inflation. The unemployment rate is expected to remain unchanged at 3.7% whilst the PCE is forecasted to drop slightly, suggesting there may be no need for further aggressive rate hikes.

 

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USD/JPY reaction

 

As mentioned earlier, USD/JPY has been one of the most sensitive pairs to the weakening of US data. Just look at the reaction to the weaker-than-expected CPI data on the 10th of November for reference. The pair dropped almost 6% in two sessions. Of course, USD/JPY was at extremely overbought levels at that point and so it was easy to gather selling momentum once the reason was found, but I expect the pair to remain volatile throughout the coming days as the upcoming events unfold.

GBP/USD

1.24 Price
-0.070% 1D Chg, %
Long position overnight fee -0.0039%
Short position overnight fee 0.0004%
Overnight fee time 22:00 (UTC)
Spread 0.00013

USD/JPY

130.04 Price
+0.150% 1D Chg, %
Long position overnight fee 0.0056%
Short position overnight fee -0.0141%
Overnight fee time 22:00 (UTC)
Spread 0.010

GBP/JPY

161.01 Price
+0.050% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0001%
Overnight fee time 22:00 (UTC)
Spread 0.028

EUR/USD

1.09 Price
+0.250% 1D Chg, %
Long position overnight fee -0.0082%
Short position overnight fee 0.0025%
Overnight fee time 22:00 (UTC)
Spread 0.00006

The reaction to Powell’s speech may be muted as he is unlikely to change course very much with his messaging. Of course, if he does, investors will likely take that as a sign of approval for the Federal Reserve to start slowing down its rate hikes, meaning the dollar will be in for another round of selling. 

The reaction to the data is likely to consolidate risk sentiment heading into the final Fed meeting of the year on December 14th. Updated data shows markets are pricing in 55bps in December and the CME fed watch page is showing a 69.9% chance of a 50bps hike, with the remaining 30% leaning towards another 75bps hike. I expect the data this week to skew that even further, the direction of course will depend on the readings.

 

Rate probabilities for the December 14th Fed meeting

Rate probabilities for the December 14th Fed meetingRate probabilities for the December 14th Fed meeting. Photo: capital.com. Source: CME Group

A softer PCE and an unchanged (or even higher) unemployment rate will fire up the dovish sentiment once again, fuelling risk sentiment and dragging the dollar down. On the contrary, a stronger PCE and unchanged unemployment rate (it’s hard to see it coming in below 3.7%) will undo some of the expectations of a smaller rate hike and therefore correct some of the positioning in markets, meaning the dollar gets a lift. A mixed reading, where the impact of the data of the Fed decision is unclear, will likely mean traders will be reluctant to take up positions heading into December, but I do expect the bearish tilt on the dollar to remain throughout. 

 

USD/JPY technical analysis

 

The recent price action on the daily chart shows consolidation just below the 140 mark as the USD sellers came into the picture once again last week. The pair is still a while away from its 200-day SMA which means bears may remain in control for longer but there seems to be a lack of conviction in the direction at the start of the week. 

The speech from Powell may be the first reason for USD/JPY to position themselves ahead of the US data out on Thursday and Friday, so watch out for wider daily ranges starting this evening. So far the resistance along the 139.40 level has been holding so the path of least resistance looks lower, but the daily candlesticks are showing long wicks to the downside, suggesting that dollar sellers are struggling to consolidate the support to achieve a significant move lower. Because of this, watch out for a break below 137 to confirm the continuation of the bearish retracement. 

 

USD/JPY vs US-Japan 10-year yield differential chart

USD/JPY vs US-Japan 10-year yield differential chartUSD/JPY daily chart. Photo: capital.com. Source: tradingview

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