US Consumer Sentiment Spotlights the Fed

While Japanese data and the upcoming election influence yen demand, US economic data will affect buying interest in the US dollar.

Later on Friday, US consumer sentiment numbers will take center stage, given the delay to the US jobs report. Economists forecast the Michigan Consumer Sentiment Index to fall from 56.4 in January to 55.0 in February. Waning consumer sentiment could signal a pullback in consumer spending and a softer inflation outlook. Cooling inflation would support a more dovish Fed rate path, weighing on US dollar demand.

A more dovish Fed policy stance and a more hawkish BoJ rate path would indicate a narrowing in US-Japan rate differentials. Narrowing rate differentials in favor of the yen would be bearish for USD/JPY.

According to the CME FedWatch Tool, the chances of a March Fed rate cut increased from 13.4% on January 29 to 24.3% on February 4. Meanwhile, the probability of a June cut jumped from 61.8% to 82.3%.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should assess technical indicators, incoming economic data, central bank chatter, and political developments.

On the daily chart, USD/JPY remains above its 50-day and 200-day Exponential Moving Averages (EMAs). The EMA positions signal a bullish bias. However, positive yen fundamentals continue to offset technicals.

A break below the 50-day EMA would bring the 200-day EMA into play. If breached, 150 would be the next key support level.

Importantly, a sustained fall through the EMAs would indicate a bearish trend reversal and reaffirm the negative medium-term price outlook.