USD/JPY Price Forecast: Bears await ascending channel breakdown amid divergent BoJ-Fed bets

The USD/JPY pair turns lower following an intraday uptick to the 156.80 area and looks to extend the overnight pullback from a nearly two-week high amid the prevalent US Dollar (USD) selling. In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, retreats further from a four-week top, touched on Monday, amid dovish Federal Reserve (Fed) expectations. This marks a significant divergence in comparison to prospects for further policy tightening by the Bank of Japan (BoJ), which could benefit the lower-yielding Japanese Yen (JPY) and validates the near-term negative outlook for the currency pair.

The S&P Global reported on Monday that the US Manufacturing PMI held steady at 51.8, pointing to continued expansion. On the other hand, the Institute for Supply Management's (ISM) Manufacturing PMI declined to 47.9 from 48.2 in November and indicated persistent contraction in the business activity. The data reaffirmed market bets that the Fed will lower borrowing costs in March and deliver one more interest rate cut by the end of this year. Moreover, expectations that the Trump-aligned new Fed chair will push for aggressive action, which keeps the USD on the defensive and exerts downward pressure on the USD/JPY pair.

Meanwhile, BoJ Governor Kazuo Ueda said on Monday that the central bank will continue to raise interest rates if economic and price developments move in line with its forecasts. The outlook pushed yields on the rate-sensitive two-year and the benchmark 10-year Japanese government bonds (JGB) to their highest level since 1996 and 1999, respectively. The resultant narrowing of the rate differential between Japan and other major economies could support the JPY amid fears of government intervention. This further validates the near-term negative outlook and suggests that the path of least resistance for the USD/JPY pair is to the downside.

Investors, however, remain uncertain about the likely timing of the next interest rate hike. This, along with fiscal concerns and a generally positive risk tone, might keep a lid on any meaningful gains for the safe-haven JPY. Traders might refrain from placing aggressive directional bets and opt to wait for the release of the closely-watched US Nonfarm Payrolls (NFP) report on Friday. Apart from this, other important US macroeconomic indicators scheduled this week might offer cues about the Fed's rate-cut path. This, in turn, will play a key role in influencing the near-term USD price dynamics and provide a fresh impetus to the USD/JPY pair.

USD/JPY 1-hour chart

Technical Analysis:

Short-term moving averages slope downward and cap intraday rebounds, while broader averages flatten, reflecting a soft tone. The Moving Average Convergence Divergence (MACD) hovers around the zero line with a flat histogram, reinforcing a neutral momentum backdrop. RSI at 41 stays below the midline, suggesting modest bearish pressure after bouncing from the low-30s. The ascending channel from 155.46 remains intact, with support near 156.16; a firm bounce off this floor could stabilize the USD/JPY pair, whereas a close beneath it would expose further downside.

Spot prices currently trade near the channel’s lower boundary, keeping bears attentive as rallies stall below declining averages. A sustained MACD turn higher with a widening positive histogram would improve the upside outlook, while an RSI push through 50 would shift momentum toward recovery. Losing 156.16 would put the focus on the channel’s origin at 155.46, whereas holding above the floor could allow a corrective move toward the topside of the structure.

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