Sagging equity prices appear to be a precursor to yen gains, and could potentially push USD/JPY down to important support if they continue.

USD/JPY has stayed in a narrow range since the December Fed meeting, as solid U.S. growth indicators drove Treasury yields higher, while equity indexes eased.

Friday’s price action suggests that movements in U.S. share prices and volatility are playing a more central role in guiding the pair.

After a strong U.S. jobs report pushed Treasury 10-year yields to a 14-month high, U.S. stocks came under pressure, and USD/JPY quickly reversed its gain. The yield curve subsequently flattened after a University of Michigan report showed consumer inflation expectations rising.

Negative sentiment triggered by rising yields has undermined other yen counterparts. GBP/JPY is down for a fourth day and trading below its lower Bollinger Band as concerns mount that rising gilt yields will undercut growth.

For USD/JPY, the key sentiment driver appears to be U.S. equities. Continued weakness in stocks could push a relatively calm USD/JPY toward significant support levels at the post-Fed low of 156.02 and the 156.09 weekly cloud top. A break below the 156.80 21-DMA and the Dec. 20 close of 156.84 has momentum heading in that direction. By contrast, a move back above Friday's new YTD high of 158.885 would shift the bias in favor of bulls.

Yen traders will be watching Bank of Japan policy expectations, U.S. inflation data and the Trump administration as it takes shape. Deputy Governor Hirai will provide some BOJ insights on Jan. 14, possibly reinforcing the market’s more hawkish stance ahead of the January meeting.

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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)

((robert.fullem@thomsonreuters.com;))