The USD/JPY currency pair is increasingly influenced by US Treasury yields, Nasdaq performance, and market volatility, overshadowing the upcoming decisions from the Federal Reserve and Bank of Japan. A midweek drop in US Treasury yields, driven by weakening sentiment towards AI-related investments, pushed USD/JPY out of its recent trading range. However, sentiment stabilized by Friday, partially reversing those moves and delivering a bullish signal on the daily chart.
Despite the Fed and BoJ meetings this week, earnings updates from major AI-related companies, particularly the hyperscalers, could have an even greater impact on USD/JPY. Traders are focused on guidance regarding AI capital expenditure and expected returns on these investments, which have already been heavily priced into markets.
The correlation between USD/JPY and US 10-year Treasury yields has strengthened, reaching +0.97 over five sessions, with similar trends observed over longer timeframes. This shift indicates that markets are now more influenced by AI sentiment than crude oil movements, making it a key focal point for traders.
US Treasury yields have seen significant declines over the past fortnight, with the 10-year yield dropping 25.6 basis points, one of the largest moves in the past year. The Fed is expected to leave rates unchanged this week, with only a 12% probability of a 25 basis point hike. Meanwhile, the BoJ is also anticipated to hold rates, with markets favoring a December hike, though confidence in that outcome has waned.
Technically, USD/JPY found support at 156.68 on Friday, with bulls defending the level and driving the pair back above it. Immediate support levels are at 156.68 and 156.05, with a more pronounced support zone between 155.50 and 155.00. The pair's movement suggests that bulls are positioned to defend the 156.68 level.