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 decline 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 interest rate decisions this week, earnings updates from AI-related companies, particularly the major hyperscalers, may have an equally significant impact on USD/JPY. Traders are keenly watching for guidance on AI capital expenditure and expected returns, as doubts about the technology's profitability have weighed on global tech stocks.
The correlation between USD/JPY and US 10-year Treasury yields has strengthened to +0.97 over five sessions, with similar trends observed over longer periods. This shift suggests that markets are now more focused on AI sentiment than crude oil movements, making it a key factor for traders in the coming week.
US Treasury yields have seen significant declines, with the 10-year yield dropping 25.6 basis points over the past fortnight. The spread between two and 10-year yields has flattened by 14.7 basis points, reflecting reassessments of the US growth outlook. Meanwhile, the probability of a Fed rate hike this week has dropped to just 12%, with markets now looking to December for potential tightening.
The Bank of Japan is also expected to hold rates this week, with a December hike still favored but with reduced confidence. The BoJ's updated economic and inflation projections will be closely watched for clues about future rate movements. Economic data releases, including Japan's inflation measures and US Q3 GDP, may take a back seat to broader market sentiment.
Technically, USD/JPY found support at 156.68 on Friday, with bulls defending the level and delivering a dragonfly doji pattern. Immediate support levels are at 156.68 and 156.05, with a more pronounced support zone between 155.50 and 155.00. A significant move would likely require surprises from either the Fed or BoJ.