Gold prices just lower; monthly gains on track
Directional risks may be skewing lower, but the pair remains sensitive to Fed policy and U.S. labour market data for any decisive breakout.
- USD/JPY closes below 50-day MA for the first time since July.
- Momentum signals turning bearish; RSI under 50, MACD negative.
- U.S. rate expectations likely the main catalyst for next breakout.
USD/JPY Outlook Summary
A surprise drop in Japanese unemployment and ongoing strength in underlying inflationary pressures in Tokyo keeps the Bank of Japan on track to continue lifting interest rates in the months ahead, offering support for the Japanese yen against the US dollar.
Following a close beneath the key 50-day moving average on Thursday for the first time since early July, directional risks for USD/JPY may be skewing lower. However, given strong linkages between market pricing for Fed rate cuts and USD/JPY movements over the past fortnight, the most likely catalyst to see the pair break out of the sideways range is fresh information on the U.S. economy.
While Friday’s PCE report will provide insights on spending, incomes and inflation, labour market data released next week is a more likely catalyst to spark potential volatility.
Japanese Unemployment Drops Sharply
Japan’s unemployment rate slipped to 2.3% in July, the lowest level since December 2019, undershooting market expectations for it to remain steady at 2.5%. The further tightening in labour conditions may spill over into stronger wage growth, reinforcing confidence that inflationary pressures are becoming more durable.
That view is supported by Tokyo’s August CPI excluding fresh food and fuel, which rose 3.0% from a year earlier. The measure, closely watched by the BOJ as a gauge of underlying inflationary trends, shows price pressures remain sticky and above the bank’s 2% target. Together, these dynamics keep pressure on policymakers to continue lifting rates beyond the current 0.5% level.
Source: TradingView
The broader picture is less robust, however. Industrial production fell 1.6% in July, a steeper decline than expected, while retail sales rose just 0.3% from a year earlier, well short of forecasts. Softer consumption, in part reflecting the drag from higher prices, remains a headwind for growth even as labour market strength points to further wage gains ahead.
BOJ Rate Hike Favoured by Year-End
Markets are weighing the conflicting signals, with swaps indicating roughly a two-in-three chance of another 25bp BOJ hike by year-end and a full hike priced by March 2026.
Source: Bloomberg
U.S. Rate Pricing Remains in Driving Seat
While expectations for further BOJ tightening continue to provide some support for the yen, it’s the U.S. interest rate outlook that has had far greater influence over USD/JPY in recent weeks, particularly shifts in expectations for the Fed funds rate.
Source: TradingView
You can see that in the strong relationship between rate cut pricing for the Federal Reserve out to June next year and USD/JPY, with a correlation of -0.78 over the past fortnight. It’s not a lockstep relationship, but the USD has tended to weaken when rate cut pricing rises, and strengthen when the opposite occurs.
USD/JPY has also been positively correlated with VIX future and negatively correlated with S&P 500 futures over the same period, suggesting risk appetite is not currently a major driver. While there is a modestly positive correlation between U.S. yields and yield spreads with Japan, it is far weaker than what’s seen at the front of the U.S. rates curve—this is where attention should be focused.
U.S. Labour Data Looms Large
Traders will get top-tier U.S. economic data later Friday with the PCE report for July, including the Fed’s preferred underlying inflation measure. But using CPI and PPI data released earlier in the month, it rarely delivers a major surprise versus consensus. Consumption and incomes data within the report could still be a catalyst, especially if very strong or weak.
Source: TradingView
With the Fed focused on downside risks to the labour market following weak July payrolls, next week’s JOLTs, ADP and nonfarm payrolls releases loom as the key events for the U.S. interest rate outlook. Late Thursday, Fed governor Christopher Waller—currently the leading candidate in betting markets to become the next Fed chair—flagged the potential for the FOMC to deliver a ‘supersized’ rate cut in September if another weak payrolls report comes through.
USD/JPY Closes Beneath 50DMA
Source: TradingView
Heading into this period of major macroeconomic events, directional risks for USD/JPY may be starting to skew lower even if the pair remains very much entrenched in the sideways range it’s been sitting in since the start of August.
For the first time since early July, the pair closed beneath the key 50-day moving average, departing from the trend of recent weeks of bouncing whenever it was tested. It’s only early days, but the price retested the level in early Asian trade on Friday before being rejected, hinting the 50 may now revert to offering resistance rather than support.
Like the price action, momentum indicators are also edging towards delivering outright bearish signals, although the broader picture remains neutral for the moment. RSI (14) is trending lower beneath 50 while MACD staged a bearish crossover of the signal line at the start of August and has been pushing lower ever since, moving into negative territory for the first time since early July on Friday.
The combined price and momentum picture just looks sluggish, warning a period of downside may be looming.
Given how frequently USD/JPY bounced from beneath 147.00 in August, traders should be wary about the initial close beneath the 50-day moving average, especially as it’s also month-end. A second consecutive close would bolster the case for downside.
As for levels to monitor, the price bounced strongly from 146.23 on August 14, putting that on the radar for shorts. Below, support is found at 146.00 and 144.40.
On the topside, the bearish pin candle that printed Wednesday topped out at 148.20, making that relevant if we were to see a reversal higher. 148.80 was another level that sparked a big reversal earlier this month, with the 200-day moving average and resistance at 149.00 located just above. That zone may prove to be tough to crack without a major hawkish U.S. rates catalyst.