A slightly bullish USD/JPY outlook is facing headwinds as the dollar weakens and Treasury yields drop. A surge in claims, coupled with forecasts for a more subdued core PCE inflation reading, has reinforced confidence in a trajectory of aggressive Fed rate cuts, overshadowing annualized core inflation holding at 3.1%. Three Fed cuts are fully priced by year-end, with the funds rate potentially hitting 3% by July. As such, Treasury 10-year yields have dipped below 4% as the curve bull flattens. Meanwhile, the prospect of low or negative real rates is driving the S&P 500 to new highs and lifting risk-sensitive currencies like the Australian dollar and Swedish krona. The euro is also gaining after European Central Bank President Christine Lagarde confidence in the region’s economic outlook. With the Fed and Bank of Japan meetings and quarter-end approaching, short-covering of the yen may be emerging. Gold pulling back from record levels may also reflect some position squaring. As such, USD/JPY risks closing below its 55-day moving average at 147.25 for the first time since July 2 -- a potentially bearish development. An ascending Ichimoku cloud between 146.66 and 147.97 suggests this may be just a bull retracement, though continued dollar weakness could change that view, particularly if USD volatility starts to rise. For more click on <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Yen https://fingfx.thomsonreuters.com/gfx/buzz/jnpwbzyyqvw/sept%2011%20comm.png ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Robert Fullem is a Reuters market analyst. The views expressed are his own.) ((mailto:robert.fullem@thomsonreuters.com))
