The USD/JPY exchange rate retreated for the fifth consecutive day as market participants reacted to the shock Shigeru Ishiba resignation as Japan’s prime minister and as odds of a Federal Reserve interest rate cut rose. It dropped to 147.35, down by over 1.2% from last month’s high.

Ishiba’s resignation and BoJ interest rate decision 

The USD/JPY exchange rate pulled back after Japan’s Prime Minister Ishiba resigned during the weekend. The ruling party is now working on the potential candidates who will replace him in the coming months. Some of the floated names are Sanae Takaichi, Shinjiro Koizumi, Yoshimasa Hayashi, and  Takatuki Kobayashi.

Meanwhile, market participants are still waiting for next week’s interest rate decision by the Bank of Japan (BoJ), which will come out on September 19.

There are three scenarios, including a modest interest hike, status quo with a hawkish bias, and a surprise rate hike. The most likely scenario is where the bank leaves the interest rate unchanged and leaves the door for a future hike open.

Recent macro data showed that Japan’s inflation remained higher than expected. The headline Consumer Price (CPI) eased to 3.1% in July from 3.3% in the previous month. Core CPI, which excludes the volatile food and energy prices, remained at 3.1% during the month.

Inflation could remain high in the coming weeks as Japan is set to implement a 6.3% wage hike, which will fuel more demand.

US inflation data

The USD/JPY exchange rate is also reacting to the recent weak jobs numbers from the US. A report by the Bureau of Labor Statistics showed that the economy created just 22,000 jobs in August, lower than the median estimate of 75,000.

This report also showed that the unemployment rate rose to 4.3%, the highest level since the pandemic, a sign that Donald Trump’s policies are having an impact on the economy.

The BLS will release its annual revision of jobs numbers later on Tuesday, with analysts expecting it to revise numbers by as much as a million. This report will mean that the labor market is more fragile than initially expected.

The most important data will come out on Thursday when the US releases the official consumer inflation data. Economists expect the report to show that the headline Consumer Price Index (CPI) rose from 2.7% in July to 3.0% in August as companies continued to adjust their prices.

Core inflation, which excludes the volatile food and energy prices, is expected to remain at 3.1%. As such, the Federal Reserve will likely deliver a rate cut in the next meeting despite the economy remaining in a stagflationary period.

USD/JPY technical analysis 

USD/JPY chart | Source: TradingView The daily timeframe chart shows that the USD/JPY exchange rate has been under pressure in the past few days. It has moved from a high of 149 to 137 after falling in the last five consecutive days.

The pair has moved below the 50-day and 25-day Exponential Moving Averages. It is also hovering slightly above the important major S/R level of the Murrey Math Lines tool at 146.87.

Therefore, the most likely scenario is where it continues falling and then bounces back after the Federal Reserve interest rate cut. In this case, it may drop to 146.10, the bottom of the trading range, and then rally to the important resistance level at 149.

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