The Fed has made it clear that a further weakening in US labour market would be unwelcome, especially if it leads to a sharp increase in unemployment. With leading indicators continuing to deteriorate, and given the Fed thinks policy is already very restrictive, the risk of the FOMC kicking off its easing cycle with a 50 basis point cut looks underpriced. It could be even more if we see unemployment lift sharply.
For an interest rate sensitive FX pair such as the USD/JPY, the growing risk of the Fed having to move aggressively creates additional downside risks. When you throw on top the threat of carry trade unwinds if riskier asset classes start to decline, it could be disorderly in nature as seen in early August.
Incoming US labour market data needs to portray a sense of resilience, otherwise the narrative of supersized Fed rate cut will only grow. Unless the data impresses, which looks unlikely given prevailing trends, selling breaks and rallies remains the preferred option in USD/JPY.
Sitting on support at 143.63, a push through this level may see bearish bets swell, putting a retest of the August low of 141.70 on the cards. If the break occurs, you could sell with a stop above 143.63 for protection against reversal.
The key data releases to watch jobless claims, ADP national employment, along with ISM services, especially the employment subindex.
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