While market bets on a BoJ rate hike are boosting demand for the yen, key US data will fuel speculation about multiple Fed rate cuts.
US Personal Income and Outlays Report Takes Center Stage
Later on Friday, the highly anticipated Personal Income and Outlays report will be under the spotlight. Economists expect the Core PCE Price Index to rise by 2.9% year-on-year and by 0.2% MoM in September, matching August’s trends.
Despite the delayed report reflecting September numbers, any shift from August levels would likely influence bets on December and March Fed rate cuts. A more dovish Fed rate path would pull 10-year Treasury yields sharply lower, narrowing US-Japan rate differentials further.
Rising 10-year JGB and falling 10-year Treasury yields further support the short- to medium-term USD/JPY outlook, with 140 a medium-term price target.
Other stats include preliminary Michigan Consumer Sentiment numbers. The inflation components will require attention, given the market focus on the Fed’s dual mandate. Economists forecast Michigan Inflation Expectations to drop from 4.5% in November to 4.4% in December.
While key US data will influence US dollar demand, there are no FOMC member speeches to overshadow the reports. Fed Blackout Period is in effect until December 11, limiting Fed-driven volatility.
According to the CME FedWatch Tool, the probability of a December cut stood at 87.0% on December 4, down from 90.0% on December 3. Meanwhile, the chances of a March rate cut slipped from 53.4% to 48.8%. However, traders should closely monitor the December and March trends. The absence of US inflation data left softer labor market data to drive expectations. Incoming inflation data will recalibrate market expectations, with sticky inflation likely to curb dovish calls.
Technical Outlook: USD/JPY on a Downward Trajectory
Looking at the daily chart, USD/JPY traded above the 50-day and 200-day Exponential Moving Averages (EMAs), affirming a bullish bias. However, fundamentals have begun to shift from the technical trend, supporting a bearish outlook.
A break below the 155 support level would bring the 50-day EMA into play. If breached, the 153 support level would be the next key support. Crucially, a drop below the 50-day EMA would signal a bearish trend reversal, suggesting a near-term fall toward 150.
