USD/JPY Forecast: Pair Holds Near 158.13

Although yen volatility remains elevated, former Bank of Japan board member Asahi Noguchi believes Japan no longer needs expansionary policies aimed at stimulating demand. He noted that underlying inflation is approaching the central bank's 2.0% target, while wage growth is becoming embedded at levels consistent with that objective.

Noguchi also said that the significant decline in the probability of another US Federal Reserve rate increase in October should allow the Japanese regulator to keep borrowing costs unchanged this month. However, he expects the Bank of Japan to raise its policy rate from 1.25% to 1.50% in December. In the longer term, he believes the rate could reach 1.75% or even 2.00%, depending on US monetary policy and developments in the Middle East.

At the same time, Noguchi noted that the Bank of Japan remains concerned about the risk of the yen weakening beyond 160 per US dollar, as this could trigger another wave of imported inflation. A gradual tightening of monetary policy therefore remains likely even if the regulator avoids another increase at its October meeting.

As expectations of an adjustment in US monetary policy this month have declined, the dollar is holding near 102.20 on the USDX, slightly below its recent highs. No major US macroeconomic releases are expected in the immediate term, and investors continue to assess September business activity data from S&P Global, which showed the Services PMI increasing from 56.5 points to 58.8 points, its strongest level since July 2021.

At the same time, the market continues to assess the significant downward revisions to recent US labour-market data. According to current market pricing, the probability that the Federal Reserve will keep interest rates unchanged at its October 28 meeting is around 77%, while the probability of another 25-basis-point increase is approximately 23%.

As discussed in our previous USD/JPY forecast, uncertainty surrounding the timing of the next moves by both the Federal Reserve and the Bank of Japan remains one of the key drivers of the pair.

Support and resistance levels

On the daily chart, the trading instrument is correcting within an upward trend and attempting to consolidate above the resistance line of the global descending channel with boundaries of 157.50–155.00.

Technical indicators are strengthening the buy signal: the fast EMAs of the Alligator indicator remain above the signal line, while the AO histogram is forming corrective bars in positive territory.

Support levels: 157.50, 155.20.

Resistance levels: 158.80, 161.00.

USD/JPY trading scenarios and exchange rate forecast

Long positions may be opened after the price consolidates above 158.80, with a target at 161.00. Stop-loss — 157.80. Implementation period: 7 days or more.

Short positions may be opened after the price declines and consolidates below 157.50, with a target at 155.20. Stop-loss — 158.50.