USD/JPY Price Forecast: Bears retain control amid divergent BoJ-Fed expectations, US-China trade tensions

The USD/JPY pair prolongs its weekly downtrend for the third consecutive day – also marking the sixth day of a negative move in the previous seven – and touches a two-week low, around the 143.45 region during the early European session on Wednesday. The downfall is sponsored by a combination of factors, which supports prospects for an extension of the recent sharp retracement slide from over a one-month high, around the 148.65 zone touched last Monday. The Japanese Yen (JPY) is underpinned by bets that the Bank of Japan (BoJ) will hike interest rates again and draws additional support from reviving safe-haven demand.

In fact, the BoJ's April 30-May 1 Summary of Opinions released earlier this week revealed that policymakers haven't given up on further policy tightening and saw scope to resume rate hikes after a temporary pause. Moreover, BoJ Deputy Governor Shinichi Uchida said earlier this week that Japan's underlying inflation is likely to re-accelerate after a period of slowdown and that the central bank will keep raising interest rates if the economy and prices improve as projected. Adding to this, hopes for progress in trade negotiations between the US and Japan, and the possibility of an eventual deal, continue to drive flows towards the JPY.

Japan's Trade Minister, Ryosei Akazawa, is expected to attend the upcoming third round of ministerial-level talks with US Trade Representative Jamieson Greer. US Treasury Secretary Scott Bessent is also likely to take part in the negotiations. Meanwhile, US officials are reportedly pressing Japan for an early conclusion to the talks, suggesting that a deal could be reached sooner. This, to a larger extent, overshadows disappointing data from Japan released earlier this Wednesday, which showed that trade balance unexpectedly shrank to a deficit of ¥115.8 billion in April compared to a surplus of ¥559.4 billion in the prior month.

Additional details of the report revealed that Japanese imports shrank at a slower-than-expected pace as a bumper springtime hike in wages boosted private consumption, while export growth slowed sharply on the back of softer US demand following US President Donald Trump's higher import tariffs. Hence, the outcome of US-Japan trade talks will play a key role in influencing the near-term sentiment surrounding the JPY. In the meantime, the prevalent US Dollar (USD) selling bias contributes to the USD/JPY pair's recent downward trajectory and supports prospects for a further near-term depreciating move.

Traders ramped up their bets for further rate cuts by the Federal Reserve (Fed) following last week's softer-than-expected US Consumer Price Index (CPI) and the Producer Price Index (PPI). Moreover, the disappointing US monthly Retail Sales data increased the likelihood of several quarters of sluggish growth and should allow the Fed to stick to its policy easing stance. This, along with a surprise downgrade of the US government's sovereign credit rating and US fiscal concerns, drags the USD Index (DXY), which tracks the Greenback against a basket of currencies, to a nearly two-week low and favors the USD/JPY bears.

USD/JPY 4-hour chart

Technical Outlook

An intraday breakdown through the 144.30-144.20 confluence – comprising the 50% Fibonacci retracement level of the April-May rally and the 200-period Simple Moving Average (SMA) on the 4-hour chart – was seen as a key trigger for bears. Adding to this, oscillators on the daily chart have just started gaining negative traction and validate the near-term negative outlook for the USD/JPY pair. The subsequent downfall, however, stalls ahead of the 61.8% Fibo. retracement level.

Hence, it will be prudent to wait for some follow-through selling below the 143.45 area, or the daily low, before positioning for a further depreciating move. The USD/JPY pair might then weaken further below the 143.00 mark and aim to test the next relevant support near the 142.40-142.35 region. The downward trajectory could eventually drag spot prices to the 142.00 round figure mark.

On the flip side, the Asian session peak, around the 144.55 zone, now seems to cap any further intraday recovery, above which the USD/JPY pair could aim to reclaim the 145.00 psychological mark. Any further move up, however, might still be seen as a selling opportunity and remain capped near the 145.35-145.40 region, or the 38.2% Fibo. retracement level. The latter should act as a pivotal point, and a sustained move beyond might shift the near-term bias in favor of bullish traders.