USD/JPY Forecast: Awaits Fed Chair Powell’s speech before the next leg down

The USD/JPY pair comes under some renewed selling pressure on Friday and reverses a part of the overnight modest gains, led by a goodish US Dollar (USD) recovery from the YTD low. Spot prices, however, manage to hold above the weekly low touched on Wednesday and remain confined in a multi-day-old range as traders opt to wait on the sidelines ahead of a crucial speech by Federal Reserve (Fed) Chair Jerome Powell later today. Powell's remarks at the Jackson Hole Symposium will be scrutinized for cues about the US central bank's rate-cut path, which will influence the US Dollar (USD) price dynamics and determine the next leg of a directional move for the currency pair. In the meantime, expectations for an imminent start of the Fed's policy easing cycle continue to act as a headwind for the buck and seem to weigh on the currency pair. 

According to the CME Group's Fedwatch Tool, investors are convinced that the US central bank will lower borrowing costs by 25 basis points (bps) and are also pricing in the possibility of a larger-than-normal, 50 bps rate cut move. The bets were lifted by the annual benchmark review of employment data released on Wednesday, which showed that US employers added 818,000 fewer jobs than reported during the year through March. Furthermore, the minutes of the July 30-31 FOMC meeting revealed that an increasing number of policymakers backed the case for a rate cut next month amid progress in bringing down inflation. Adding to this, the US Department of Labor (DoL) reported on Thursday that Initial Jobless Claims rose to a seasonally adjusted 232K in the week ending August 17, up from the 228K previous, pointing to a cooling labor market. 

Meanwhile, the S&P Global flash composite US PMI showed that the business activity in the US private sector continued to expand at a healthy pace and a fall in selling price inflation to a level close to the pre-pandemic average. Additional details of the report indicated that the gauge for the services sector unexpectedly ticked higher, though was largely offset by the fact that business activity in the US manufacturing sector shrank at the fastest pace this year. This, in turn, revived fears that the world's largest economy is at risk of a slowdown and tempers investors' appetite for riskier assets, driving some haven flows towards the Japanese Yen (JPY) and contributing to the USD/JPY pair's downtick. The JPY is further underpinned by Bank of Japan Governor Kazuo Ueda's hawkish remarks, signaling to raise rates if inflation stays on course to hit the 2% target.

Speaking during his first appearance in Japan's parliament, Ueda said that the recent market volatility – led by concerns of a US recession – would not derail the BoJ's long-term rate hike plan. This marks a big divergence in comparison to the Fed's dovish outlook, which, in turn, suggests that 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 145.00 psychological mark ahead of the weekly low, around the 144.45 region touched on Wednesday. Some follow-through selling will reaffirm the negative outlook and prompt aggressive selling. Given that oscillators on the daily chart are holding deep in negative territory and still away from being in the oversold zone, the USD/JPY pair might then accelerate the fall towards the 144.00 round figure. The downward trajectory could eventually drag spot prices to the 143.40 intermediate support en route to the 143.00 mark.

On the flip side,  any strength beyond the 146.00 round figure might continue to attract fresh sellers and remain capped near the 146.50-146.55 supply zone. A sustained strength beyond, however, could trigger a short-covering rally and lift the USD/JPY pair beyond the 147.00 mark, towards the next relevant hurdle near the 147.35-147.40 region. Some follow-through buying could negative the negative outlook and pave the way for a move towards reclaiming the 148.00 mark.

USD/JPY 4-hour chart