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Wage growth and demand-driven inflation remain prerequisites for a BoJ move away from negative rates.
Sentiment toward the monetary policy outlook will test buyer appetite for the Yen. However, risk-off sentiment stemming from the Middle East conflict may cushion the downside for the Yen. There are no economic indicators from Japan to consider on Friday.
However, inflation and trade data from China will influence market risk sentiment.
US Consumer Sentiment and the Fed in the Spotlight
On Friday, consumer sentiment will provide direction to the USD/JPY. An unexpected pickup in consumer sentiment would support more hawkish Fed rate hike bets. Economists forecast the Michigan Consumer Sentiment Index to fall from 68.1 to 67.2 in October.
An upward trend in consumer sentiment would signal a positive consumption outlook. Increased consumer spending can fuel demand-driven inflation, prompting the Fed to consider hiking rates as a measure to curb spending.
Higher interest rates affect borrowing costs, making firms cut staff costs to manage profit margins. A deteriorating labor market environment would lead to a pullback in spending on non-essential items, easing demand-driven inflationary pressures.
After the hotter-than-expected US CPI Report, investors must monitor FOMC member speeches throughout the session. FOMC member support for further Fed rate hikes to tackle inflation would support buyer appetite for the US dollar.
Beyond the economic calendar, news updates from the Middle East also warrant consideration. A pre-weekend escalation in the conflict would support demand for the Japanese Yen.
Short-term Forecast
The US CPI Report and BoJ commentary tilted monetary policy divergence firmly toward the US dollar. However, the Middle East conflict and intervention threats will remain headwinds for the USD/JPY at around the 150 handle.
USD/JPY Price Action
Daily Chart
The USD/JPY sat above the 50-day and 200-day EMAs, sending bullish price signals. A break above the 150.293 resistance level would support a move toward 151.
Hawkish Fed commentary and an unexpected pickup in consumer confidence would support the appetite for the US dollar.
However, a slump in consumer sentiment and an escalation in the Middle East conflict would weigh on the USD/JPY. A drop below the 148.405 support level would bring the 50-day EMA into play.
The 14-day RSI at 61.58 supports a USD/JPY move to the 150.293 resistance level before entering overbought territory.
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