USD/JPY consolidates near 110.00 ahead of critical NFP data

• USD/JPY awaits Friday NFP report for the next catalyst in the US dollar's trajectory. 
• Investors have moved into risk with prospects of the convergence between the Fed and ECB.

USD/JPY is consolidated in mid-US trade around 110.00 the figure as traders get set for the end of the week's showdown in the US Nonfarm Payrolls data.

USD/JPY has traded between a range of 109.91 and 110.21 while the US dollar has been sent to the lowest levels since Aug 5. 

The DXY has seen an exodus of flow due to a dovish tilt at the Federal Reserve that was followed up by an awful miss in the US ADP report as a prelude to this Friday's Nonfarm Payrolls.

Risk is piling up in investors portfolios as the divergence between the US Fed and its rivals, such as the European Central Bank, is starting to dwindle, stripping the greenback of its yield advantage.

This is a significant development for USD/JPY given the safe-haven allure of both the yen and the US dollar.

After the NZD, the JPY has been the second-best performing G10 currency in the quarter to date.

''Slowing growth in China combined with the spread of the Delta variant in S.E Asia and in Australia has led to an underperformance of stocks in the Asian region relative to the US and Europe,'' analysts at Rabobank said.

'Until risk appetite fully returns to EM, it is likely that the JPY will retain a firm stance against a basket of currencies. That said, we expect USD/JPY to trade in a 110 to 111 range on a 1 to 3-month view.''

The DXY has declined for nine of the last ten sessions and down 1.3% from the August highs.

There has been a hawkish twist at the European Central Bank which is squeezing the US dollar longs while US data echos the Federal Reserve's chair cautious tones. 

Chair Powell said that while the Fed has probably got to the point where “substantial further progress” has been made on inflation “we have much ground to cover to reach maximum employment”.

Powell also explained in his Jackson Hole speech that an “ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired”. In an environment of “substantial” labour market slack, this could be “particularly harmful”.

Yesterday's ADP report, which missed expectations by a mile has been taken as a potential prelude to Nonfarm Payrolls in Friday's data.

ADP private-sector jobs came in soft at 374k vs. 625k expected. 

Consensus currently sees 725k jobs added vs. 943k in July, while the Unemployment rate is expected to fall two ticks to 5.2%. 

''We know ADP and NFP don't always line up well but this reading will likely pull down the whisper number for tomorrow.'' That said, we note that NFP came in at 943k last month even though ADP was lower than expected at 330k,'' analysts at Brown Brothers Harriman explained, highlighting the uncertainties around tomorrow's data.

USD/JPY technical analyst

The 10-year yields were pressured to the dynamic trendline support.

This could also be considered as neckline support of the head and shoulders.

If the yield falls below this support it will face 1.2210 as the first horizontal support as the last defence of the double bottom lows:

On the flipside, trendline resistance in the 10-year yield will be targetted as a supporting combination for USD/JPY. 

USD/JPY bulls will be looking to break the 110 level and in doing so, a break out of the wedge formation to target 110.80:

Failing a bullish scenario for the US dollar, the 200-day EMA near 108.50 will be the focus: