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USD/JPY Forecast: Post-NFP Rebound at Risk on More Dovish Fed Rhetoric

USD/JPY Forecast: Post-NFP Rebound at Risk on More Dovish Fed Rhetoric

David Song, Strategist

Japanese Yen Talking Points

USD/JPY pares the decline following the Federal Reserve meeting as U.S. Non-Farm Payrolls (NFP) expand 304K in January, but the flash-crash rebound may continue to unravel over the coming days as the central bank drops the hawkish forward-guidance for monetary.

Image of daily change for major currencies

USD/JPY Rate Pares Fed-Driven Losses Following Upbeat NFP Report

Image of daily change for usdjpy rates

As the Fed warned, updates to the NFP report revealed wage growth moving ‘lower in recent months,’ with Average Hourly Earnings narrowing to 3.2% from a revised 3.3% per annum in December, but there appears to be an ongoing improvement in employment as discouraged workers return to the labor force.

Image of DailyFX economic calendar

The uptick in the Unemployment Rate to 4.0% from 3.9% was accompanied by an unexpected expansion in the Labor Force Participation Rate, which climbed to 63.2% from 63.1% during the same period to mark the highest reading since 2013.

Image of Fed Fund Futures

Signs of a more robust labor market may undermine the recent shift in Fed rhetoric as the central bank pledges to be ‘data dependent,’ and Chairman Jerome Powell & Co. may find it difficult to defend a wait-and-see approach as the economy shows little to no signs of an imminent recession. Nevertheless, Fed Fund Futures continue to show the Federal Open Market Committee (FOMC) on hold throughout 2019 as the central bank warns that ‘the case for raising rates has weakened somewhat,’ and Fed officials may continue to tame bets for higher interest rates as Chairman Powell is slated to hold a townhall next.

A batch of dovish comments is likely to drag on the dollar as the FOMC alters the outlook for monetary policy, and USD/JPY exhibit a more bearish behavior over the coming days as the Relative Strength Index (RSI) clings to the bearish formation carried over from late-2018. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

USD/JPY Daily Chart

Image of usdjpy daily chart
  • The advance from the 2018-low (104.63) may continue to unravel amid the string of failed attempts to break/close above the 109.40 (50% retracement) to 110.00 (78.6% expansion) region, with USD/JPY at risk of facing a more bearish fate as the Relative Strength Index (RSI) seems to be responding to trendline resistance.
  • Still need a break/close below the 108.30 (61.8% retracement) to 108.40 (100% expansion) area to bring the downside targets on the radar, with the next region of interest coming in around 106.70 (38.2% retracement) to 107.20 (61.8% retracement).
  • Will keep a close eye on the RSI as it stands at risk of flashing a bullish signal, with a break of trendline resistance raising the risk for range-bound conditions in USD/JPY.

For more in-depth analysis, check out the Q1 2019 Forecast for the Japanese Yen

Additional Trading Resources

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Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019.

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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