Friday (August 29) Asian morning session saw USD/JPY barely holding above yesterday's closing price, trading around 146.98. US interest rate expectations may serve as the core catalyst for the next downward breakout in the exchange rate. USD/JPY closed below the 50-day moving average for the first time since July. Momentum indicators have turned bearish: the Relative Strength Index (RSI) fell below the 50 neutral line, while the MACD entered negative territory. Meanwhile, bearish moving average pressure above the exchange rate has suppressed USD/JPY's rebound appetite.
Japan's unemployment rate unexpectedly declined, and Tokyo's underlying inflation pressure remains persistently high, suggesting the Bank of Japan may continue its rate hike trajectory in the coming months, providing support for the yen against the dollar. However, over the past two weeks, market pricing for Federal Reserve rate cuts has shown an extremely high correlation with USD/JPY movements. Therefore, the core catalyst for this currency pair to break out of its sideways range will still be the latest signals from the US economy. Although Friday's Personal Consumption Expenditures (PCE) report will reveal specific performance in consumption, income, and inflation, next week's labor market data is more likely to trigger potential volatility in the exchange rate.
**Inflation Pressure Supports BOJ Year-End Rate Hike**
Japan's July unemployment rate fell to 2.3%, the lowest level since December 2019, below market expectations of maintaining 2.5%. The further tightening of the labor market is expected to accelerate wage growth, thereby strengthening market confidence in the sustainability of inflation pressure. Tokyo's August core CPI (excluding fresh food and energy) rose 3.0% year-on-year, providing strong support for this view.
The Bank of Japan regards this indicator as a core reference for measuring underlying inflation trends. The data shows that current price pressure remains sticky and significantly above the central bank's 2% target level. Collectively, these factors will continue to pressure policymakers to further raise rates from the current 0.5% level.
However, Japan's overall economic performance is not robust. July industrial output declined 1.6%, exceeding market expectations for decline; retail sales grew only 0.3% year-on-year, far below market forecasts. Although a strong labor market suggests future wages may rise further, weak consumption (partly dragged down by rising prices) remains the main obstacle constraining economic growth.
**USD/JPY Exchange Rate Control Still Lies with the Federal Reserve**
Market expectations for a BOJ rate hike by year-end are weighing these contradictory signals: swap contracts show about a two-thirds probability that the Bank of Japan will raise rates by another 25 basis points by year-end, with expectations for one rate hike fully priced in by March 2026. While market expectations for further BOJ policy tightening provide some support for the yen, what has had a greater impact on USD/JPY trends in recent weeks is still the US interest rate outlook—especially changes in market expectations for the federal funds rate. Over the past two weeks, the correlation between Fed rate cut pricing through June 2025 and USD/JPY reached -0.78, showing a very clear relationship. Although the two are not perfectly synchronized, generally speaking, when rate cut expectations heat up, the dollar weakens, and vice versa. During the same period, USD/JPY also showed positive correlation with VIX index futures and negative correlation with S&P 500 index futures, indicating that current risk appetite is not the main driving factor for exchange rates. Although US Treasury yields and their spreads with Japanese government bonds show weak positive correlation, the correlation is much lower than with US short-term interest rate curves. Future market attention should focus on changes in US short-term interest rates.
**US PCE and Labor Data Play Decisive Factors in USD/JPY Direction**
Later Friday, traders will face the US July Personal Consumption Expenditures (PCE) report, a top-tier economic data release containing the Federal Reserve's preferred core inflation indicator. However, referring to the Consumer Price Index (CPI) and Producer Price Index (PPI) released earlier this month, the probability of this report's results significantly deviating from market consensus is low. But consumption and income data in the report may still serve as exchange rate catalysts, especially in cases of extremely strong or weak data performance.
After weak July non-farm payroll data, the Federal Reserve has begun to focus on downside risks in the labor market. Therefore, next week's Job Openings and Labor Turnover Survey (JOLTS), ADP employment data, and non-farm payroll reports will become key events affecting US interest rate prospects.
Governor Christopher Waller, currently considered the most likely candidate to become the next Federal Reserve Chair according to betting markets, said Thursday that if the next non-farm payroll report continues to be weak, the Federal Open Market Committee (FOMC) may implement an "unconventional magnitude" rate cut in September.
Tonight's US PCE data signal will create a super trading opportunity here. If data exceeds expectations, this will be the starting point for a dollar rebound. Meeting or falling short of expectations may cause USD/JPY to break downward, accelerating yen appreciation.
Technical analysis shows a higher probability of USD/JPY breaking lower. Of course, if exchange rates don't move as expected, later coordination with the VIX index or US stock declines will also create good trading opportunities. Although USD/JPY remains deeply trapped in the sideways range since early August, downside risks may already be emerging. The currency pair closed below the key 50-day moving average for the first time since early July, breaking the pattern of "testing this average and then rebounding" seen in recent weeks. Although still in the early signal stage, during Friday's Asian morning session, exchange rates faced clear resistance when testing this average, suggesting the 50-day moving average may have transformed from a support level to a resistance level.
Consistent with price movements, momentum indicators are also gradually releasing clear bearish signals—although the overall pattern remains in neutral territory. The 14-day Relative Strength Index (RSI) is trending downward and has fallen below 50; in early August, the MACD indicator formed a bearish crossover with the signal line, continuing to decline since then and entering negative territory Friday for the first time since early July. Both price and momentum indicators showing weakness suggests exchange rates may be about to begin a downward cycle.
Given that USD/JPY has rebounded multiple times below 147.00 in August, traders should remain cautious about "the first close below the 50-day moving average," especially during the current month-end fund rebalancing window. Consecutive closes below this average for two trading days would further strengthen the downward logic.
On August 14, exchange rates showed strong rebound around 146.23, which will become a key target for bears to focus on. Support levels below include the 146.00 round number and 144.40. On the upside, the bearish shooting star high of 148.18 formed Wednesday will become key resistance for exchange rate rebounds; earlier this month, 148.80 also triggered significant exchange rate reversals, with the 200-day moving average and 149.00 resistance level not far above. Without major hawkish US interest rate signals, this resistance zone may be difficult to reach.
As of 13:40 Beijing time, USD/JPY is quoted at 146.98/99.