USD/JPY Forecast: Stands firm as fiscal woes counter hawkish BoJ ahead of FOMC Minutes

The USD/JPY pair attracts fresh buyers following the previous day's good two-way price swings and sticks to intraday gains near the 153.70 region through the first half of the European session on Wednesday. The Japanese Yen (JPY) is pressured by renewed concerns about Japan's fiscal health and fears that Japan's Prime Minister Sanae Takaich will push back against further interest rate hikes by the Bank of Japan (BoJ). Apart from this, the prevailing risk-on mood further undermines the JPY's safe-haven status, which, along with a modest US Dollar (USD) uptick, turns out to be a key factor acting as a tailwind for the currency pair.

Data released earlier this week showed that Japan's Gross domestic product (GDP) grew 0.1% during the October-December quarter, undershooting market forecasts of 0.4% rise. Adding to this, the previous quarter's reading was revised down to show a contraction of 0.7%, putting extra pressure on Japan's PM Takaichi to announce more stimulus. The International Monetary Fund (IMF), however, warned against cutting the consumption tax, saying that it would erode Japan's fiscal space and raise debt risks. This adds to market worries that Takaichi’s fiscal spending would balloon Japan’s elevated debt-to-GDP ratio and weighs on the JPY.

Meanwhile, traders have been pricing in the possibility that the central bank could raise interest rates as soon as March or April. That said, Takaichi's historic election victory has heightened market attention to whether the dovish premier will renew her calls for the central bank to keep interest rates low. This, to a larger extent, overshadowed data showing that Japan's exports rose at the fastest pace since November 2022. Moreover, the Reuters Tankan poll revealed that Japanese manufacturers' confidence rose for the first time in three months in February. Furthermore, the IMF urged Japan to raise rates to keep inflation expectations well anchored.

This comes on top of hopes that Takaichi could be fiscally responsible and that her policies will boost the economy, which might prompt the BoJ to stick to its policy normalization path. This marks a significant divergence in comparison to dovish Federal Reserve (Fed) expectations and should hold back the USD bulls from placing aggressive bullish bets. Investors might  also opt to wait for the release of the FOMC Minutes for more cues about the Fed's rate-cut path. Apart from this, Japan's National Consumer Price Index (CPI) and the US Personal Consumption Expenditure (PCE) Price Index, both due on Friday, will provide a fresh impetus to the USD/JPY pair.

USD/JPY daily chart

Technical Analysis:

From a technical perspective, spot prices once again showed some resilience near the 200-day Exponential Moving Average (EMA) earlier this week, and the subsequent move up favors bullish traders. The SMA is trending higher, preserving a broader bullish bias and cushioning setbacks.

Moreover, the Moving Average Convergence Divergence (MACD) sits below the zero line with its negative reading contracting, suggesting fading bearish pressure. Adding to this, the Relative Strength Index (RSI) at 42 (neutral) is edging higher, aligning with stabilization attempts.

Measured from the 140.13 low to the 159.28 high, the 38.2% Fibonacci retracement at 151.97 offers near-term support, and a rebound from that area could target the 23.6% retracement at 154.76. A daily close beneath the said support would open room for deeper consolidation, while a close back above the 23.6% threshold would strengthen recovery prospects.

(The technical analysis of this story was written with the help of an AI tool.)