Title: USD/JPY Weekly Forecast: Labor Market Data Reinforces Dovish Fed Policy
Author Credit: Originally published by Yohay Elam on Forex Crunch
The USD/JPY currency pair experienced a dip last week, ending around the 146.20 level after testing highs above 147.80. This retreat was largely due to soft labor market data from the United States, which added weight to expectations that the Federal Reserve may pause or pivot from its current tightening cycle. As Treasury yields pulled back and market sentiment recalibrated, the yen gained some support against the dollar. However, with the Bank of Japan (BoJ) maintaining its ultra-easy monetary stance, USD/JPY continues to remain in bullish territory over the medium term.
This week promises significant volatility with the release of key economic data from both the U.S. and Japan, which could shape future price movement. Let’s explore the major developments from last week, indicators to watch over the coming days, and the broader technical and fundamental context surrounding the USD/JPY exchange rate.
Key Developments This Past Week
– Labor Market Weakness: The U.S. jobs report reinforced signs of a decelerating labor market.
– Nonfarm payrolls came in at 187,000 in August, slightly above expectations but still below the 200,000 mark that typically signals robust job creation.
– The unemployment rate unexpectedly rose to 3.8%, the highest since February 2022.
– The labor force participation rate climbed to 62.8%, indicating more people are returning to the labor market, which could help ease wage pressures.
– Average hourly earnings increased by just 0.2% on a monthly basis, down from 0.4% the previous month—a signal that wage-driven inflation could be cooling.
– JOLTS and ADP Reports Signal Cooling Momentum:
– Job openings fell more than expected to 8.827 million from a revised 9.165 million, highlighting a labor market that may be approaching equilibrium.
– ADP private payrolls grew by 177,000 in August, far below the 371,000 seen in July, suggesting private sector hiring is moderating.
– Fed Commentary Turns Cautious:
– Fed officials, including Cleveland Fed President Loretta Mester, highlighted risks of overtightening monetary policy amid a cooling labor market.
– Markets lowered their expectations for a Fed rate hike in the September meeting, further pressuring the USD.
– Japanese Economic Indicators Present Mixed Signals:
– Japan’s unemployment rate ticked up to 2.7%, slightly above expectations.
– Industrial production dropped by a more-than-expected -2.0% in July, adding to concerns about the country’s economic recovery and keeping the BoJ cautious about shifting policy.
Fundamental Drivers: Dollar Weakness vs. Yen Dovishness
The last several weeks have seen rising speculation that the Federal Reserve may soon halt its interest rate hikes, predominantly driven by softer inflation measures and signs that the red-hot labor market is cooling. For those trading USD/JPY, this presents a crucial macroeconomic dynamic: both central banks continue to lean dovish, but the Fed’s pivot has reached a more advanced stage while the BoJ remains committed to ultra-accommodative policy tools.
Despite the pullback in Treasury yields and the softening dollar, it’s important to note that the yield differential between U.S. and Japanese government bonds still heavily favors the greenback.
Key Points on Central Bank Policy Outlooks:
Federal Reserve:
– While inflation remains above the 2% target, signs of moderation have emerged.
– Focus has shifted from inflation containment to avoiding overtightening.
– Futures markets now price in almost a full pause in hikes for the September and possibly even the November meeting.
– A hawkish hike still lingers if inflation rebounds, but current labor data points toward caution.
Bank of Japan:
– The BoJ remains
Explore this further here: USD/JPY trading.