• USD/JP gains fresh momentum on Friday and is under pressure from a combination of factors.
• The Fed and BoJ’s divergent policies, combined with a dovish risk attitude, form the basis for the JPY’s safe haven.
• Traders expect Fed Chairman Jerome Powell’s speech to prompt a rate cut and fresh stimulus.

The USD/JPY pair is coming under some renewed selling pressure on Friday, reversing some of last night’s modest gains, led by a fairly decent recovery in the US dollar (USD) from its YTD low. However, spot prices are holding above Wednesday’s weekly low and remain confined within a multi-day range as traders opt to wait on the sidelines ahead of a crucial speech by Federal Reserve (Fed) Chairman Jerome Powell later today. Powell’s remarks at the Jackson Hole Symposium will be scrutinized for signals on the US central bank’s rate cut path, which will influence the price dynamics of the US dollar (USD) and determine the next phase of a directional move for the currency pair. In the meantime, expectations of an imminent start to the Fed’s policy easing cycle continue to act as a headwind for the dollar and look set to weigh on the pair.

According to the CME Group’s Fedwatch Tool, investors are confident the U.S. central bank will cut borrowing costs by 25 basis points (bps) and are also pricing in the possibility of a larger-than-normal rate cut of 50 bps. Bets were raised by the annual benchmark review of employment data released on Wednesday, which showed U.S. employers created 818,000 fewer jobs than reported for the year through March. Moreover, minutes from the July 30-31 FOMC meeting revealed that a growing number of policymakers were backing the case for a rate cut next month amid progress in curbing inflation. In addition, the U.S. Department of Labor (DoL) reported on Thursday that initial jobless claims rose to a seasonally adjusted 232,000 in the week ended Aug. 17, up from 228,000 previously, pointing to a cooling labor market.

Meanwhile, the S&P Global flash composite US PMI showed that US private sector business activity continued to expand at a healthy pace and retail price inflation eased to levels close to its pre-pandemic average. Additional details from the report showed that the services sector indicator ticked higher unexpectedly, although this was largely offset by the fact that US manufacturing business activity contracted the fastest this year. This in turn revived fears that the world’s largest economy is at risk of a slowdown and dampened investors’ appetite for riskier assets, fueling some safe-haven flows into the Japanese yen (JPY) and contributing to the USD/JPY pair’s decline. The JPY is further supported by hawkish comments from Bank of Japan Governor Kazuo Ueda, who indicated that he would raise interest rates if inflation remains on track to hit the 2% target.

In his first appearance before Japan’s parliament, Ueda said recent market volatility – driven by concerns about a US recession – would not derail the BoJ’s long-term rate hike plan. This is a stark difference from the Fed’s dovish outlook, which in turn suggests the path of least resistance for the USD/JPY pair is to the downside.

Technical outlook

From a technical perspective, any further weakness is likely to find some support near the psychological level of 145.00 ahead of the weekly low, around the 144.45 area reached on Wednesday. Some follow-on selling will confirm the negative outlook and fuel aggressive selling. Given that the oscillators on the daily chart remain deep in negative territory and are still not in the oversold zone, the USD/JPY pair could accelerate the decline towards the round figure of 144.00. The downward trajectory could eventually drag the spot prices towards the intermediate support of 143.40 on the way to the 143.00 mark.

On the other hand, any strength beyond the 146.00 round figure could continue to attract new sellers and remain confined to the 146.50-146.55 supply zone. However, sustained strength beyond that could trigger a short-covering rally and push the USD/JPY pair past the 147.00 mark towards the next relevant hurdle near the 147.35-147.40 region. Some follow-through buying could undermine the negative outlook and pave the way for a move towards reclaiming the 148.00 mark.

USD/JPY 4-hour chart