USD/JPY selloff inflicts heavy technical damage ahead of key US jobs data

• USD/JPY slumps as BoJ hawkishness and US yield shifts fuel yen gains
• BoJ’s Tamura sees rates hitting at least 1% by early 2026
• BoJ June rate hike now deemed a coin-flip
• US payrolls data is next major test, with unemployment rate in focus

Summary

Japanese yen bulls are in control thanks to hawkish commentary from Bank of Japan (BoJ) officials, adding to a lengthening list of positive economic data that keep the bank on track to continue lifting interest rates.

USD/JPY finds itself trading at multi-month lows heading into Friday’s key US nonfarm payrolls report. What comes next has the power to turbocharge the unwind or spark a gravity-defying, face-ripping rebound. Strap in and hold on tight!

USD/JPY Feeling the Squeeze

As covered in USD/JPY notes earlier this week, the relationship between USD/JPY and US-Japan yield differentials continues to strengthen, as seen in the chart below.

Source: TradingView

Over the past month, the correlation with benchmark 10-year yield spreads has firmed to 0.9, showing the two tend to move in the same direction. The same holds for spreads at the front and back end of bond curves, though to a lesser extent. This reinforces that relative interest rate outlooks remain a key driver of USD/JPY, with the recent narrowing in spreads a major factor behind the latest downside move.

Reassuring commentary from the US Treasury Secretary Scott Bessent about potential measures to lower benchmark Treasury yields, along with some patchy US economic data, has contributed. Meanwhile, strong Japanese wage data and hawkish remarks from former and current BoJ officials have added to the yen’s tailwind.

Source: Refinitiv

BoJ board member Naoki Tamura—a known inflation hawk—added fuel to the fire on Thursday, arguing inflationary pressures and Japan’s improving fundamentals warrant a shift away from ultra-loose policy. He suggested the economy may be operating above potential—a signal of inflationary pressure—and noted corporate and household inflation expectations are now anchored around 2%.

Tamura said overnight policy rates should reach at least 1% by late fiscal 2025 (early calendar 2026), warning that even with a move to 0.75%, real interest rates would remain deeply negative.

His comments saw swaps markets bring forward expectations for the next BoJ rate hike, with another 25bp move now seen as a coin-flip by June. That said, a policy rate of 1% by year-end is still viewed as a long shot.

Source: Bloomberg

Payrolls Preview: Finding Signal in the Noise

With both yield differentials and USD/JPY declining, Friday’s US nonfarm payrolls report at 8:30 am ET will likely decide whether those trends persist or reverse. The graphic below shows economist forecasts for payrolls, unemployment, wages, and the average workweek.

Source: TradingView

With my colleague Matt Weller already providing an excellent payrolls preview, there’s no need to go into excessive detail here—you can read it [here]. But I’ll leave you with my two cents on what matters and what doesn’t.

First, while the payrolls number may drive the initial market reaction, the unemployment rate is the most important figure in the report. That’s what the Fed is judged on—not the outright level of job creation. Payrolls and earnings are important, but if they send conflicting signals with the unemployment rate, the latter is more likely to dictate the bigger picture.

Second, the payrolls number for January is likely to be a dog’s breakfast Not only has the BLS has difficulty adjusting for seasonal patterns at the start of the calendar year, but there has simply been so much disruption across the country. The recovery from hurricanes in the deep south, wildfires ravaging Los Angeles, arctic weather in other parts—it points to ample statistical noise but very little signal. Throw on top revisions to prior payrolls data and it screens as a messy report that could provide narratives for everyone.

That’s why the unemployment rate remains key!

With markets pricing less than two 25bp rate cuts this year, and the Fed making it clear it does not need to see further weakening in the labour market to achieve its inflation mandate, a weak jobs report may deliver a far larger market reaction than one that exhibits strength. For USD/JPY, that implies directional risks are asymmetrically skewed to the downside.

USD/JPY Bulls on the Ropes

Source: TradingView

Technically, Thursday’s drop did some damage, taking out the 50-week moving average and bids at 151.95 before finding support at 151.30. Below that, 148.65 is the next key level. On the topside, watch for offers around 151.95, the 50-week moving average, and 153.30.

Momentum indicators like RSI and MACD are turning bearish, favouring selling rallies and downside breaks.

-- Written by David Scutt

Follow David on Twitter @scutty

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