Can USD/JPY Find Support Amid AI Concerns Ahead of Next Week’s Central Bank Meetings?

Yen strength has pushed USD/JPY towards 157, with the AI sell-off weighing on the U.S. dollar as markets look ahead to next week's key central bank meetings.

Concerns about the sustainability of debt-funded AI infrastructure, alongside declining Treasury yields, have dragged the U.S. dollar to a three-week low.

The tech-heavy Nasdaq is leading declines in U.S. stock futures on Thursday. Investors are assessing the latest earnings, which have done little to ease concerns about substantial debt-funded AI investments.

Also coming under scrutiny is the view that an AI-driven boom will sustain U.S. economic resilience, with robust growth keeping U.S. interest rates higher for longer. Doubts about this outlook are adding to pressure on the dollar.

An unusual feature of the current market is the strong positive correlation between the U.S. dollar and U.S. stocks, which stands at 0.65 on a 30-day rolling basis. Typically, the dollar moves in the opposite direction to U.S. equities. Should worries about AI investment continue to pressure both equities and the dollar, USD/JPY could extend its decline.

Initial jobless claims are the main focus on an otherwise relatively light U.S. economic calendar. Markets will then look to next week's FOMC rate decision on Wednesday, the 28th. While the Fed is expected to hold rates steady in October, markets assign a 95% probability to another rate hike before the year ends.

Can safe-haven demand sustain yen gains ahead of inflation data?

Safe-haven demand is increasingly favouring the Japanese yen. Having traded within a narrow range for most of October, the currency has advanced sharply to a three-week high.

Hawkish signals from Bank of Japan officials are providing additional support alongside safe-haven inflows. Bank of Japan Deputy Governor Ryozo Himino said yesterday that underlying inflation was nearing the bank's 2% target and warned against an excessively slow pace of policy adjustment. These comments echoed the hawkish tone struck by Governor Ueda earlier in the week.

Friday's national inflation release is the next key focus. Expectations are for core national CPI to climb from 1.7% to 2.1%, indicating stronger domestic inflationary pressures and the transmission of higher energy prices to the broader economy. A hotter inflation reading could strengthen hawkish BoJ expectations and lend support to the yen through a narrower Fed-BoJ interest rate differential.

Although the Bank of Japan is expected to hold rates steady in October, it is seen lifting them to 1.5% in December, continuing its quarterly tightening pace.

USD/JPY technical analysis: could the decline extend?

USD/JPY has slipped below the 200 EMA after consolidating above it, with the pair now moving towards 157. This breach of key support, together with an RSI reading below 50, leaves sellers hopeful that further losses may follow.

For sellers, a move below support at 156.75 would shift the focus to the 155 support zone. Beyond that, attention would turn to the September low of 153.

Any recovery would first encounter resistance at 157.75, where the 200 EMA lies, followed by the 50 EMA at 158. The October high of 159 marks the next resistance level. Clearing it would establish a higher high and put the 160 resistance zone in focus.