USD/JPY falls on AI jitters & ahead of central bank meetings next week

USD/JPY has fallen towards 157 as the yen benefits from U.S. dollar weakness amid the AI selloff and as attention turns to key central bank meetings next week.

The U.S. dollar has fallen to a three-week low, tracking Treasury yields lower and amid concerns over the sustainability of debt-funded AI infrastructure.

U.S. stock futures are falling on Thursday, led by the tech-heavy Nasdaq, as investors weigh the latest earnings, which have failed to calm worries over huge AI debt-funded investments.

Furthermore, expectations that the AI boom will keep the U.S. economy resilient and strong growth will support higher U.S. interest rates for longer are being challenged. Concerns over that outlook are also pulling the dollar lower.

What's notable is the high correlation between the U.S. dollar and U.S. stocks, currently at 0.65 on a 30-day rolling basis. The U.S. dollar usually trades inversely to U.S. stocks, making the current relationship curious. If concerns over AI investment continue to weigh on U.S. equities and the dollar together, USD/JPY could fall further.

The U.S. economic calendar is relatively quiet, with initial jobless claims in focus. Attention will turn to next week's FOMC rate decision on Wednesday, the 28th. The Fed is not expected to raise rates in October, but the market is pricing in a 95% probability of another rate hike before the end of the year.

Yen rises on safe-haven demand ahead of inflation data

Meanwhile, the Japanese yen is proving to be the safe-haven currency of choice. After spending most of October trading in a tight range, the yen has risen sharply to its highest level in three weeks.

In addition to safe-haven flows, hawkish commentary from Bank of Japan officials is helping to underpin the yen. Yesterday, Bank of Japan Deputy Governor Ryozo Himino noted that underlying inflation was approaching the bank's 2% target and cautioned against moving too slowly with policy adjustments. His comments reinforced hawkish remarks made by Governor Ueda earlier in the week.

Attention now turns to national inflation data on Friday. Core national CPI is expected to rise to 2.1%, up from 1.7%, suggesting domestic inflationary pressures are increasing and higher energy prices are filtering through into the wider economy. Hotter inflation could raise hawkish BoJ expectations and support the yen by narrowing the Fed-BoJ rate differential.

The Bank of Japan is expected to leave rates unchanged in October but is seen raising rates in December to 1.5%, maintaining a quarterly pace of tightening.

USD/JPY technical analysis

After a period of consolidation above the 200 EMA, USD/JPY has broken below this key support, falling towards 157. The break below the 200 EMA, combined with the RSI below 50, keeps sellers hopeful of further downside.

Sellers will look to break below 156.75 support to turn attention towards the 155 support zone, before 153, the September low comes into focus.

On the upside, immediate resistance is seen at 157.75, the 200 EMA, ahead of 158, the 50 EMA. Further resistance lies at 159, the October high. A break above this level would create a higher high and bring the 160 resistance zone into focus.