This morning, the dollar/yen pair is actively recovering from a sharp drop yesterday. On Tuesday, the pair plummeted from the high of 147.375 in response to shocking economic data from the US. Let's explore what undermined the exchange rate and its further prospects.

USD shattered by harsh reality

Until yesterday, the dollar bulls were confident that the US economy was doing well. This instilled hope for another interest rate hike this year, especially since the Federal Reserve Chair mentioned such a possibility last Friday.

At the economic symposium in Jackson Hole, Jerome Powell stated that the regulator might need further tightening to complete the fight against inflation.

The hawkish rhetoric supported the American currency on all fronts, with the USD/JPY pair benefiting the most.

This Tuesday, the yen tumbled against the greenback to a 10-month low of 147.375. Recent dovish comments from the BOJ Governor also pressured the Japanese currency.

Speaking at the economic forum in Jackson Hole, Kazuo Ueda drew attention to the still-low core inflation in Japan, justifying his intention to continue the current ultra-loose policy in the future.

Thus, monetary divergence between the US and Japan once again became the main driving force for the USD/JPY pair. However, traders' confidence in its further strengthening was noticeably shaken yesterday.

Macroeconomic data released at the start of this week showed that not everything is going smoothly in the US. The US economy is starting to falter under the weight of prolonged hawkish policies, which might prompt the Fed to move towards monetary easing earlier than expected by the market.

Last Friday, the head of the American central bank promised to proceed cautiously at the upcoming FOMC meetings and emphasized that incoming data would be the regulator's main guide in decision-making.

Yesterday's batch of economic releases turned out to be extremely disappointing. In August, the Conference Board's Consumer Confidence Index, reflecting Americans' confidence in the stability of the country's economy, decreased to 106.10 from the previous value of 114.00, against market expectations of 116.0.

However, the greatest shock for the dollar bulls came after the publication of the JOLTS report on the number of job openings in the US labor market. In July, the indicator fell short of the market consensus, which anticipated a rise to 9.465 million and stood at only 8.827 million. This is the lowest level since March 2021.

In the context of these pessimistic data, traders revised their forecast regarding an additional round of tightening in the US this year.

Currently, futures markets assess the probability of a rate hike in November at 47% although it was at 62% as recently as Monday.

The weakening hawkish sentiment among investors led to a sharp decline in the yields of US Treasuries across the curve. Yesterday, the yield on 2-year government bonds plummeted by 18 basis points to 4.871%, while the yield on 10-year government bonds dropped to a low not seen since August 11, at 4.106%.

The drop in these indicators triggered a steep fall in the USD/JPY pair. The pair closed the session on Tuesday at 145.84, losing almost 0.5% for the day.

Additional pressure on the exchange rate also came from the rise in market speculation about possible changes in the monetary policy course of the BOJ, following recent hawkish comments from Japanese officials.

On Monday, Tsutomu Watanabe, former candidate for the Bank of Japan Governor, accused the BOJ of underestimating inflation. According to him, the regulator conceals the real situation in order not to instill hope in investors regarding the normalization of monetary policy.

An unexpected statement was made this week by the leading hawk of the Bank of Japan, Naoki Tamura. Speaking before local business leaders in Hokkaido, the official suggested that the central bank could achieve its long-awaited goal of a stable 2% inflation level as early as the beginning of next year.

This would mark the start of a new monetary era in Japan. Tamura expects that the BOJ will start raising rates in the first quarter of 2024.

Such a scenario is very favorable for the Japanese currency and could lead to a significant drop in the dollar/yen pair from its current levels.

Near-term outlook for USD/JPY

This morning, the US dollar started an upside correction against the yen. At the time of writing, it strengthened by 0.28% to the level of 146.32.

In the coming days, analysts predict increased volatility for the USD/JPY pair, as traders anticipate a fairly busy economic calendar.

Today, investors' attention will be on the ADP employment report in the US nonfarm sector, as well as the final data on US GDP for the second quarter.

Tomorrow, the key trigger will be the publication of the Personal Consumption Expenditures (PCE) Price Index, which the Fed uses as a primary inflation indicator. Friday will see the culmination with the release of the monthly Nonfarm Payrolls employment report.

Considering the market's strong reactions to secondary data like the JOLTS report and the Consumer Confidence Index CB, experts anticipate that major USD pairs could experience even greater turbulence by the end of the week, as NFP is one of the most crucial macroeconomic indicators for the US.

Currency strategist Matt Simpson warns that Friday will be the busiest day of the week, but investors should also buckle up for strong volatility on Wednesday and Thursday.

At this stage, USD bears can use any data confirming the JOLTS report which indicated cracks in the American economy.

If the market receives downbeat data in the near future, the dollar will continue to weaken across the board, including against the Japanese yen. Conversely, we may see a confident recovery of the greenback to its recent highs.

Technically, the dollar/yen pair looks quite promising now, despite the recent drop in quotes. Analysis of the daily chart shows that the short-term forecast for the pair is optimistic.

The Relative Strength Index (RSI) is above its average line and demonstrates an upward trend. The MACD indicator shows green bars, indicating a potential strengthening of the bullish momentum.

Furthermore, the pair still holds above the 20-, 100-, and 200-day simple moving averages. This suggests that buyers stay in control on a broader scale.

Most likely, bulls will manage to maintain their advantage in the short term. Bears will take control only if the asset breaks through the 3-week ascending support line around 145.55.