USDJPY at a Critical Junction Awaiting NFP

Just days ahead of the FOMC meeting, there is a lot riding on the jobs report on Friday, with investors wondering if it will halt or confirm further monetary policy easing.

A Challenging Task for the Fed

Next week, the Fed will meet for its November meeting while votes may still be counted and the electoral results remain unclear. It will not have data for CPI in October but will have the latest NFP report, which places significant weight on the upcoming economic figures. Markets expect employment numbers to decrease from the surprisingly high results last month, but there remains a risk of another large beat like before, which analysts speculate could cause the Fed to pause rate cuts if the jobs numbers are too hot. This possibility received extra attention following the ADP figures from Wednesday, which exceeded consensus forecasts, though the private measure has lost its reliability in predicting NFP.

Such a result would present a serious difficulty for the BOJ, which kept interest rates steady overnight while also preventing the yen from weakening too much against the dollar. This task became substantially harder over the last couple of weeks as US bond yields rose in anticipation of a potential Trump victory, seen as likely to boost the economy and inflation through his policies. The resulting return of the carry trade could substantially push the USDJPY rate higher. On the other hand, weaker-than-expected upcoming NFP data could have a calming effect on markets, restoring hopes of additional easing by the Fed and easing pressure on the yen.

The October Jobs Report

Analysts generally agree that the rise in jobs seen in September's report was a one-off event and may be revised downwards. The consensus forecast is that the BLS will report an increase of 140,000 jobs in October, lower than the 254,000 added previously. The labour market is still expected to remain tight, with the unemployment rate predicted to stay unchanged at 4.1%. Average hourly earnings growth is expected to decrease to 0.3% compared to 0.4% in the prior month.

It is thought that the Fed's main focus has shifted from inflation, which is trending as expected, towards the potential for increased unemployment that could threaten its second policy objective. Analysts suggest that the rise in unemployment has been gradual and consistent with the post-pandemic recovery, likely implying a steady normalisation of interest rates. Further surprises could disrupt markets, as the July NFP report that roiled Japanese markets remains a fresh memory.​

USDJPY in Critical Junction

USDJPY changes hands at a critical junction as it nears the 153.50 level, which represents the 61.80% Fibonacci retracement of the bearish leg between 162 and 140. The upcoming NFPl report may determine whether the currency pair breaks through or fails to break the golden pocket. After rising sharply from the major support, a pullback towards 146.50 may be possible via 150. However, there remains the possibility of a long-term head-and-shoulders (H&S) pattern forming, which could see the currency pair fall below the 140 mark. Conversely, a move above 155 could clear the way for further advances towards 156.50 and beyond the previous high of 162.​

Source: SpreadEx / USDJPY

Key Takeaways

The upcoming US jobs report on Friday will influence the Fed's decision on further policy easing. Weaker employment growth than expected could increase hopes for additional interest rate cuts, while a strong jobs number may cause the Fed to pause. The USDJPY currency pair is at an important level as it approaches technical resistance, with the jobs data potentially determining whether it breaks through or reverses.​