USD/JPY Fundamental Daily Forecast – Powell Signals Slower Rate Hikes as Focus Shifts to Labor Market Data

The Dollar/Yen is down sharply early Thursday, dragged lower by a steep drop in U.S. Treasury yields after Federal Reserve Chairman Jerome Powell on Tuesday said the central bank’s rate hikes may slow.

The comments by Powell represent a somewhat dramatic shift in his tone although they seemed to echo remarks from several Fed officials the past two weeks and the theme of last week’s meeting minutes.

At 05:27 GMT, the USD/JPY is trading 136.302, down 1.783 or -1.29%. On Wednesday, the Invesco CurrencyShares Japanese Yen Trust ETF (FXY) settled at $67.57, up $0.36 or +0.53%.

The early session price action has put the USD/JPY is in a position to take out a major support level at 136.135. Breaking through this level with conviction could trigger the start of a steep break with 131.734 the first target and the May 24 bottom at 126.362 the primary downside objective.

Powell Delivered What the Bears Wanted to Hear

Powell’s comments weren’t really a surprise since they basically echoed the remarks from St. Louis Fed President James Bullard and New York Fed President John Williams earlier in the week. Both suggests the Fed should continue to raise rates and once they hit the terminal level, the central bank should hold them there until inflation comes down to the mandated 2% level.

Why traders reacted the way they did was because Powell made the comments and he’s the boss. Furthermore, it gave investors confidence that the Fed members were all on the same page.

Powell Confirms Smaller Rate Hikes are Likely but He Still has Issues with Inflation and Labor

Fed Chair Powell confirmed Wednesday that smaller interest rate increases are likely ahead even as he sees progress in the fight against inflation as largely inadequate. But he also cautioned that monetary policy is likely to stay restrictive for some time until real signs of progress emerge on inflation – either through a drop in job vacancies or, as some fear, a rise in unemployment.

Short-Term Outlook

The answer to the labor problem may be revealed in Friday’s Non-Farm Payrolls data. And if the weaker-than-expected ADP data, released on Wednesday, is any indication, the labor market report could surprise to the downside.

The answer to the inflation question will likely be revealed on Dec. 13 when the government reports November consumer inflation.

Powell may have offered some clarity about the size of the next several rate hikes, but he didn’t really clarify when the Fed would stop raising rates. We’re going to have to see the NFP and CPI data to determine that.

Look for trader reaction to 136.135 to set the tone on Thursday.