The USD/JPY pair has experienced significant volatility since the beginning of the week. Initially, the tech-led equity selloff created favorable conditions for a Japanese Yen rally due to risk aversion and declining USD rates. However, a rate hike by the Bank of Japan (BoJ) on Friday, coupled with unbalanced positioning, has provided additional momentum for yen bulls, according to Francesco Pesole, FX analyst at ING.
Pesole notes that USD/JPY is likely to retest the 160.0 level in the near term. While the pair dipped below 154.0 briefly, a broader dollar rebound — bolstered by renewed focus on universal tariffs — has driven the exchange rate back to the 155.50-156.0 range. This reflects the complex relationship between US protectionism and a more hawkish Federal Reserve, which has significant implications for the rate-sensitive yen.
“Despite the recent movements, there are positive signals for the yen,” Pesole remarked. He pointed out that the dollar is becoming less appealing as a safe haven amid ongoing equity market selloffs. As sentiment in the US deteriorates due to AI stock revaluations, prolonged higher Fed rates, and risks associated with US protectionism, the yen could find more opportunities to outperform, particularly in currency crosses.
Pesole also highlighted upward risks for JPY rates, as he believes markets have underestimated the BoJ’s rate hiking cycle by approximately 25-30 basis points. If US yields increase further, driving USD/JPY buyers below 155.0, EUR/JPY could potentially see some downside, with a retesting of the 160.0 level becoming a tangible possibility. Despite the turbulence, Forex market dynamics suggest several strategic opportunities for yen appreciation, especially as global economic and political uncertainties persist.
The Japanese Yen retreated further from a multi-week high against the USD on Monday. Rebounding US bond yields and modest USD strength supported USD/JPY. Divergent BoJ-Fed expectations might keep a lid on any further upside for the currency pair.
The Japanese Yen (JPY) remains on the back foot against its American counterpart, eyeing the 156.00 mark during the early European session on Tuesday. US President Donald Trump’s tariff threats, which could reignite inflationary pressures in the US, in turn, triggered a modest recovery in US Treasury bond yields, undermining the lower-yielding JPY and reviving the demand for USD. The USD Index (DXY), which tracks the Greenback against a basket of currencies, staged a solid rebound from its lowest level since December 18 touched on Monday, providing an additional boost to the USD/JPY pair.
However, the divergent policy expectations of the Bank of Japan (BoJ) and the Federal Reserve (Fed) could limit JPY losses and cap the USD. Traders now look to the US macro data for some impetus ahead of a two-day FOMC meeting starting later today. The yield on the benchmark 10-year US government bond moved away from a one-month low touched the previous day, helping revive demand for the US Dollar and undermining the Japanese Yen.
Yen gains amid equity selloff
Last week, the Bank of Japan reiterated that it would continue to raise the policy rate and adjust the degree of monetary accommodation if the outlook presented in the January meeting is realized. Moreover, the leaders of Japan’s top business lobby and labor unions have agreed on the need to maintain the momentum for pay hikes again this year, which should allow the BoJ to tighten its policy further and help limit JPY losses.
The BoJ also announced that it would provide ¥200 billion through the outright purchase of commercial paper. Separately, Japan’s Economy Minister Ryosei Akazawa said he will closely monitor the impact of the rate hike on the economy. Traders now look to Tuesday’s US economic docket – featuring Durable Goods Orders, the Conference Board’s Consumer Confidence Index, and the Richmond Manufacturing Index – for some impetus later during the US session.
The focus, however, will remain glued to the outcome of a two-day FOMC monetary policy meeting, starting this Tuesday, which will influence the USD price dynamics and provide a fresh directional impetus to the USD/JPY pair. From a technical perspective, the overnight sustained breakdown below a multi-month-old ascending trend-channel support was seen as a key trigger for bearish traders. Moreover, oscillators on the daily chart have started gaining negative traction.
This suggests that the path of least resistance for the USD/JPY pair is to the downside. Hence, any subsequent move up could be seen as a selling opportunity near the trend-channel support breakpoint, now turned resistance, around the 156.00 mark, which should cap spot prices near the 156.60-156.70 supply zone. On the flip side, the 155.00 psychological mark now seems to protect the immediate downside ahead of the 154.55-154.50 horizontal zone, the 154.00 round figure, and the overnight swing low, around the 153.70 region.
Some follow-through selling could reaffirm the near-term negative outlook and drag the USD/JPY pair further towards the 153.30 intermediate support en route to the 153.00 mark. The Japanese Yen remains under pressure against the USD amid renewed tariff threats and rebounding US bond yields. However, divergent BoJ-Fed policy expectations and upcoming US economic data could limit losses.
The market will be closely watching Tuesday’s FOMC meeting for further direction. From a technical standpoint, key levels to watch for the USD/JPY pair include the 156.00 resistance and the 153.00 support. The USDJPY price faced additional negative pressure yesterday, breaking the 154.96 level and reaching 153.75.
Notably, the price bounced bullishly by today’s open, settling above the first level. This has maintained a neutral outlook until a clearer signal for the next trend emerges, which could be clarified by either breaking the 154.96 support or breaching the 156.45 resistance. Breaking the support may push the price to suffer new losses, targeting 153.75 again.
Alternatively, breaching the resistance may lead the price to recover, with subsequent targets at 157.65 and 158.87.