USD/JPY Fundamental Daily Forecast – Likely to Extend Losses on Softer-Than-Expected Jobs Data

The Dollar/Yen continues to plunge on Friday after breaking a key support area at 136.135 the previous session. U.S. economic data supporting a slowdown in U.S. Federal Reserve interest rates hikes is the catalyst driving prices lower. Surprisingly, the Forex pair is dropping hard ahead of today’s major U.S. Non-Farm Payrolls report, suggesting investors may be wagering on weak data.

At 10:04 GMT, the USD/JPY is trading 134.181, down 1.168 or -0.86%. On Thursday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $68.99, up $1.44 or +2.13%.

Tightening Interest Rate Spread

The drop in U.S. Treasury yields is helping to tighten the interest rate spread with its Japanese counterpart. This is making the U.S. Dollar a less-attractive currency versus the Japanese Yen. It’s also encouraging investors to dump the greenback.

Driving the movement in the USD/JPY is a combination of optimism over the size of future Fed rate hikes and U.S. economic data that supports the slowdown.

The Fed has been trying to control inflation through interest rate hikes and has raised rates by 75 basis points at each of its last four meetings. However, this week fed officials including Chairman Jerome Powell have been indicating that the pace of rate hikes could slow down soon, with the markets now expecting the central bank to implement a 50 basis point rate hike at its December meeting.

Data releases from Thursday suggested that this may be the case, with October’s core personal consumption expenditure price index reading coming in softer than expected. The index measures consumer spending without tracking food or energy and is widely recognized as one of the Federal Reserve’s favored inflation gauges.

Daily Forecast

Although the USD/JPY is already sharply lower, it could fall further if today’s U.S. Non-Farm Payrolls report supports the notion that the Fed is moving closer to ending its rate hike quest even if it may be several months away.

November’s unemployment and non-farm payroll figures are due to be released on Friday at 13:30 GMT. According to Dow Jones, economists are forecasting that the U.S. economy added 200,000 jobs throughout the month, down from 261,000 in October.

The Unemployment Rate is expected to come in at 3.7%, unchanged from October and Average Hourly Earnings are expected to have risen 0.3%.

As tightness in the labor market is historically closely associated with high levels of inflation, investors will be scanning the data for hints about whether pressures from rising prices are easing.

Generally speaking, a softer-than-expected Non-Farm Employment Change will be bearish for the USD/JPY. Combined with an unexpected rise in the unemployment rate, the news will be outright bearish for the Dollar/Yen.