USD/JPY Pulls Back After Dovish Fed & Weak Jobs Report

USD/JPY Analysis

Friday's US jobs report showed the addition of only 150,000 payrolls, marking the worst performance in almost three years. Adding to the weakness, unemployment rose to 3.9% and wages growth eased substantially, to 4.1%. However, the results were negatively impacted by the now over autoworkers strikes, which accounted for most of 33,000 drop in the "motor vehicles and parts" sector.

The poor release reinforced market expectations that the Fed is done hiking, coming after Wednesday's dovish shift by the central bank. Policymakers held rates at 5.5% for second time in a row and Chair Powell said that they are "proceeding carefully", while softening his recent unequivocal belief that policy is not sufficiently restrictive. ^[1]

USD/JPY got a one-two punch from the Fed's dovish hold and the weak NFPs. This creates risk for further losses towards October's low, although fresh impetus would likely be needed for such moves. Furthermore, the downside does not look particularly friendly and the ascending daily Ichimoku Cloud has the potential to contain stronger pressures.

On the other hand, the pair steadies today and tries to defend the EMA200 that maintains the bullish bias and the ability to tackle 152.20 - the highest rate in more than thirty-three years. The pair remains on intervention watch through, which can make the pair reticent.

USD/JPY has gained more than 15% from the start of the year until the end of October, due to the stark monetary policy that has been detrimental to the Yen. With the Fed softening its stance and its Japanese counterpart moving towards normalization of its ultra-loose strategy, there is scope for significant repricing.

However, this looks premature for now. The Bank of Japan took another step towards normalization earlier this week, by increasing YCC flexibility. However, this also allows it to sustain its dovish stance and USD/JPY reacted with new 2023 highs. Even though the Fed was softer this week, it may still need to do more. Inflation remains well above the 2% target, the economy continues to outperform and the labor market is still tight, despite coming into better balance.