USD/JPY retreats: AI jitters weigh as next week’s central bank meetings approach

157 is drawing closer as USD/JPY declines. Dollar weakness during the AI sell-off is benefiting the yen, while next week's key central bank meetings are coming into focus.

A three-week low marks the latest decline in the U.S. dollar. The currency has followed Treasury yields down as doubts grow over whether debt-funded AI infrastructure is sustainable.

With the latest earnings offering little reassurance over huge debt-funded AI investments, investors are pushing U.S. stock futures lower on Thursday. The tech-heavy Nasdaq is at the forefront of the decline.

Behind the dollar's weakness is a further concern: the assumption that an AI boom will sustain U.S. economic resilience is facing scrutiny. So too is the expectation that strong growth will keep U.S. interest rates higher for longer.

An unusually strong positive relationship now links the U.S. dollar and U.S. stocks: their 30-day rolling correlation is 0.65. This departs from the dollar's usual inverse relationship with U.S. equities. USD/JPY could face further declines if AI investment concerns keep weighing on both the dollar and equities.

On a relatively quiet U.S. economic calendar, initial jobless claims are the key release to watch. Next comes the FOMC rate decision on Wednesday, the 28th, next week. Markets price a 95% probability of another rate increase before year-end, although the Fed is not expected to raise rates in October.

Three-week high for yen as safe-haven demand builds before inflation data

A sharp rally has lifted the Japanese yen out of the narrow trading range that prevailed for most of October and into a three-week high. It is establishing itself as the favoured safe-haven currency.

Hawkish Bank of Japan commentary offers another source of yen support alongside safe-haven flows. Underlying inflation was approaching the bank's 2% target, Bank of Japan Deputy Governor Ryozo Himino noted yesterday, while cautioning against adjusting policy too slowly. His comments reinforced the hawkish remarks Governor Ueda had made earlier in the week.

Friday brings national inflation data, with core national CPI expected at 2.1%, up from 1.7%. That would suggest rising domestic inflationary pressures and the wider transmission of higher energy prices through the economy. A hotter reading could bolster hawkish BoJ expectations, narrowing the Fed-BoJ rate differential and supporting the yen.

December is expected to bring a Bank of Japan rate increase to 1.5%, following unchanged rates in October. That would maintain the bank's quarterly tightening pace.

157 in view: USD/JPY technical analysis

Having consolidated above the 200 EMA, USD/JPY has now breached that key support and is falling towards 157. Sellers remain hopeful of more downside, with the RSI below 50 adding to the signal from the break beneath the 200 EMA.

A break beneath 156.75 support is what sellers will seek next. This would bring the 155 support zone into focus, followed by 153, the September low.

The immediate barrier to an advance is 157.75 at the 200 EMA, followed by 158 at the 50 EMA. Above those levels, resistance sits at the October high of 159. Breaking above that high would form a higher high and shift the focus to the 160 resistance zone.