Crude Oil’s Rally Pauses, Prompting a Pullback in Dollar and Yen Buying; USD/JPY Remains in the 158.00s but Faces Resistance
Market Overview
Dollar and yen buying, both of which gained ground this week, are being unwound as the rally in crude oil and the rise in U.S. yields take a pause.
In the Tokyo session, the euro and sterling rebounded against the dollar, while the yen also weakened, lifting yen crosses. USD/JPY recovered from the previous New York low of 157.52 and rose to 158.42 in early London trading. It has since retreated to the lower 158.00s.
Even when broad dollar strength eases, USD/JPY can rise if yen selling outweighs dollar weakness. Today’s moves show that the dollar’s overall direction and USD/JPY are not necessarily aligned.
The focus now is the University of Michigan Consumer Sentiment Index and Canadian employment data, as well as position adjustments ahead of the weekend and Japan’s three-day holiday.
USD/JPY
USD/JPY is attracting bids on dips, while buyers are becoming more cautious as the pair approaches the mid-158.00s.
In the previous New York session, the pair fell to 157.52 as U.S. yields declined. Today, yen selling helped it recover above 158.00. However, the retreat from the early London high of 158.42 makes it difficult to conclude that buying momentum is strengthening in one direction.
The immediate focus is whether the pair can hold above 158.00 and retest today’s high of 158.42 and the area around 158.50. A decisive break above that area followed by sustained trading there could bring a move toward 159.00 into focus.
Conversely, if USD/JPY falls below 158.00 and struggles to recover, a correction toward the upper 157.00s and the previous New York low of 157.52 may follow.
With the three-day holiday approaching, concerns about intervention remain at weaker yen levels. However, assess official comments and the pace of price movements rather than assuming that the authorities will act based on a particular exchange rate alone.
University of Michigan Consumer Sentiment Index
Today’s main U.S. event is the preliminary October University of Michigan Consumer Sentiment Index, scheduled for release at 11:00 p.m. JST.
The market forecast is around 47.6–47.7, compared with 48.1 previously.
A modest decline is expected. If consumer sentiment deteriorates more than forecast, concerns about the economy could increase, potentially pushing U.S. yields and the dollar lower.
Conversely, a stronger-than-expected result could highlight resilient consumer spending and support dollar buying.
Inflation expectations will also be important, alongside the headline index. If sentiment weakens but inflation expectations rise, concerns about both slowing growth and higher prices could lead to mixed currency market reactions.
Assessing the Post-Release Reaction
The initial market reaction may focus on the headline reading, but subsequent moves in inflation expectations, U.S. yields, and equities should also be considered.
Even if weak data push U.S. yields lower, rising U.S. equities and stronger yen selling could limit a decline in USD/JPY. If concerns about the economy also trigger equity losses, yen buying could add to downward pressure on the pair.
Even after a strong reading, be cautious about the durability of the initial buying if U.S. yields fail to rise and USD/JPY stalls around 158.50.
With position adjustments ahead of the weekend also in play, watch not only the direction immediately after the release but also whether the pair can go on to make new highs or lows.
Canadian Employment Data
September Canadian employment data are scheduled for release at 9:30 p.m. JST.
Employment is expected to increase modestly, following a decline of 41,700 in the previous month.
The unemployment rate is forecast at 6.5%, compared with 6.4% previously.
The forecast points to a recovery in employment alongside a higher unemployment rate.
A larger-than-expected increase in employment, without a rise in the unemployment rate, could support the Canadian dollar. Continued weakness in employment, on the other hand, could cap its recovery.
Alongside the headline employment change, check the full-time and part-time breakdown and the labor force participation rate. For CAD/JPY, the Canadian dollar’s reaction will interact with yen movements, so USD/CAD and USD/JPY should be monitored together.
The Euro and Yen Crosses
EUR/USD rebounded to 1.1243 in the Tokyo session before retreating into the 1.1220s. Dollar weakness is providing support, but buyers remain cautious about chasing the euro higher.
The spread between French and German 10-year government bond yields narrowed to 134 basis points from levels reached when concerns over France were more intense. This is supportive for the euro, although uncertainty over France’s fiscal and political outlook has not been resolved.
The immediate focus is whether EUR/USD can hold above 1.1200 and retest the 1.1240s. For the rebound to prove sustainable, it will also be important that the French–German yield spread does not widen again.
EUR/JPY and GBP/JPY rose as rebounds against the dollar coincided with yen selling. However, if USD/JPY retreats from its highs, yen crosses could also give back some of their gains.
Other Market Drivers
ECB Executive Board members Piero Cipollone and Isabel Schnabel are scheduled to participate in a panel discussion. Watch whether their comments on inflation and the policy outlook support the recovery in European currencies.
The United Kingdom is also scheduled for a routine credit rating review. Changes in the assessment of the country’s fiscal position and debt could affect sterling, alongside any rating action itself.
The rise in crude oil has paused, but prices remain sensitive to developments in the Middle East. A renewed advance in oil could revive inflation concerns and dollar buying.
Tokyo and U.S. bond markets will be closed on October 12. Position adjustments ahead of the long weekend may therefore affect trading later in today’s New York session.
Key Points for the Overseas Session
Can USD/JPY hold above 158.00?
Can it break above today’s high of 158.42 and the area around 158.50?
Will a decline extend toward 157.52?
What will the University of Michigan survey show about consumer sentiment and inflation expectations?
How will U.S. yields and equities confirm the initial currency market reaction?
What will Canadian employment, the unemployment rate, and the employment breakdown show?
Will the French–German government bond yield spread widen again?
Will the pause in crude oil’s rally continue?
Will position adjustments ahead of the weekend and Japan’s three-day holiday shift the market’s direction?
Dollar and yen buying, both of which advanced this week, are being unwound today, with rebounds particularly visible in yen crosses. Whether USD/JPY can break above the mid-158.00s will depend on the reaction in yields and equities after the U.S. data and whether yen selling continues ahead of the holiday.
