USD/JPY plunged into the ¥155 range this week against a backdrop of a tug-of-war between Japanese and US monetary policies. As expectations for a Bank of Japan rate hike in December grew, factors supporting the yen and those weighing on the dollar continued to intersect.
In this week's foreign exchange market overview, the yen strengthened broadly against the dollar while the dollar generally remained soft. At the same time, the gradual recovery in the labor market indicated by the revised August jobs data supported market sentiment, and overall volatility remained limited.
USD/JPY fell sharply this week as caution over the tug-of-war between Western monetary policies and the Bank of Japan's stance intensified. The dollar was bought at one point when the Fed chair suggested a rate-hike stance, but the market's direction shifted again following the revision to the US jobs data.
The ¥155 range is being watched as a strong support line, and some analysts have suggested that a break below it could send the pair down to around ¥152, the year's low. Some market participants believe expectations for rate hikes by the Bank of Japan this year have risen to reflect around 2 hikes.
Next week, Japanese and US inflation and business sentiment indicators will be the focus. Depending on the moderation of US inflation and trends in Japanese corporate prices, USD/JPY could move through a significantly wider range. The Bank of Japan's rate-hike outlook is also expected to be affected by developments in the Economy Watchers Survey.
The trend in the LMCI and differences within the Fed over the monetary policy outlook will also be watched as factors affecting the market next week.