USD/JPY Price Forecast: Bulls retain control near multi-month top; US NFP report awaited

The USD/JPY pair builds on this week's breakout momentum for the fourth straight day and climbs to the 157.75-157.80 region, or its highest level since mid-January, during the early part of the European session on Thursday. Moreover, the fundamental backdrop favors bullish traders and backs the case for a further appreciating move as the focus remains glued to the delayed release of the US Nonfarm Payrolls (NFP) report for September.

The Japanese Yen (JPY) continues with its relative underperformance amid concerns about Japan's ailing fiscal position. In fact, the government proposed a supplementary budget of around ¥25 trillion to fund Prime Minister Sanae Takaichi’s stimulus plan, far exceeding last year’s ¥13.9 trillion extra budget. This, in turn, fuels worries about the supply of new government debt and lifts Japan’s borrowing costs to the highest level in decades.

Moreover, data released earlier this week showed that Japan's economy contracted in Q3 for the first time in six quarters. This, in turn, could put additional pressure on the Bank of Japan (BoJ) to delay raising interest rates and undermine the JPY. Apart from this, the upbeat market mood is seen as another factor driving flows away from the safe-haven JPY, which fails to gain any respite from verbal intervention from Japanese authorities.

Japan's Chief Cabinet Secretary Minoru Kihara said this Thursday that the recent FX moves are sharp, one-sided, and that he is watching the FX market move with a high sense of urgency. Kihara added that the FX market needs to move stably, reflecting fundamentals. This comes after Japan's Finance Minister Satsuki Katayama issued a fresh warning on Wednesday and said that the government was closely monitoring markets with a high sense of urgency. This fuels intervention fears, though it does little to ease the underlying bearish tone surrounding the JPY.

The US Dollar (USD), on the other hand, continues to draw support from less dovish Federal Reserve (Fed) expectations and climbs to its highest level since late May, lending additional support to the USD/JPY pair. In fact, chances of another rate cut in December fell after the October FOMC minutes showed on Wednesday that many participants were in favor of lowering the target range for the federal funds rate, while several were against the decision. Moreover, policymakers cautioned that cutting interest rates further could risk entrenched inflation.

This, to a larger extent, offsets market concerns about the weakening economic momentum on the back of the longest-ever US government shutdown. The USD bulls, however, might pause for a breather ahead of the crucial US monthly employment details, due later during the North American session. Nevertheless, the aforementioned supportive factors suggest that the path of least resistance for the USD/JPY pair is to the downside. Hence, any immediate market reaction to the disappointing NFP print is more likely to remain limited and bought into.

USD/JPY 4-hour chart

Technical Outlook

The daily Relative Strength Index (RSI) is flashing slightly overbought conditions and might hold back traders from placing fresh bullish bets around the USD/JPY pair. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move.

Any corrective slide, however, might now find decent support near the 156.65-156.60 region, below which the USD/JPY pair could extend the fall towards the 156.00 mark. The latter should act as a pivotal point. A sustained weakness below might prompt some technical selling and pave the way for deeper losses.

On the flip side, the 158.00 round figure could act as an immediate hurdle, above which the USD/JPY pair could climb to the next relevant resistance near mid-158.00s. The momentum could extend further and allow spot prices to aim towards testing the January swing high, around the 159.00 neighborhood.