USD/JPY Price Forecast: Bulls have the upper hand amid political risks, BoJ rate hike doubts

The USD/JPY pair touches a fresh one-year high, around the 158.20 region, at the start of a new week, though it lacks follow-through buying amid mixed fundamental cues. Against the backdrop of the uncertainty over the timing of the next interest rate hike by the Bank of Japan (BoJ) and a deepening Japan-China rift, talks of a snap election in Japan undermined the Japanese Yen (JPY) and supported the currency pair. Last week, China escalated its dispute with Japan and began restricting exports of dual-use goods, including some rare earth elements, to Japan. The ban followed a diplomatic row over Taiwan and heightens supply-chain risk for Japanese manufacturers. Furthermore, the Yomiuri newspaper reported on Friday that Japan's Prime Minister Sanae Takaichi is considering holding a parliamentary election in the first half of February.

Meanwhile, the global risk sentiment takes a hit amid concerns about further escalation of geopolitical tensions and offers some support to the safe-haven JPY. Following a strike earlier this month, US President Donald Trump said that Washington would temporarily take charge of Venezuela’s administration to oversee a transition. Moreover, Trump referred to himself as the acting President of Venezuela in a post on Truth Social. Adding to this, the WSJ, citing unnamed US officials, reported that Trump is considering reprimanding Iran in response to its crackdown on mass anti-government demonstrators, which has killed more than 500 people. In response, Iran threatened to target US military bases if Trump carries out threats to intervene. This comes on top of the intensifying Russia-Ukraine war and tempers investors' appetite for riskier assets.

A Ukrainian drone strike triggered a fire at an oil depot in Russia’s southern Volgograd region on Saturday. Russia, on the other hand, used its hypersonic Oreshnik intermediate-range ballistic missile in an overnight strike on the Lviv region, close to the EU and NATO borders. Apart from this, the emergence of some US Dollar (USD) selling contributes to capping the upside for the USD/JPY pair. As investors look past the US Nonfarm Payrolls (NFP) report, fresh concerns about the Federal Reserve's (Fed) independence drag the USD away from its highest level since December 5, touched on Friday. The closely-watched US employment details showed that the economy added 50K new jobs in December compared to expectations for a reading of 60K and 56K (revised from 64K) in the previous month. Meanwhile, the Unemployment Rate fell to 4.4%.

This data led to a shift in the likelihood of a Fed rate cut at the next policy meeting on January 28, though it fails to provide any meaningful boost to the USD. Meanwhile, Fed Chair Jerome Powell, in a rare statement, said that the threat of criminal charges against him is a consequence of the central bank setting interest rates based on the best assessment of what will serve the public, rather than following the preferences of the President. This, in turn, prompts some intraday USD selling and warrants caution for the USD/JPY bulls. Traders, however, might opt to wait for the release of the US inflation figures – the Consumer Price Index (CPI) and the Producer Price Index (PPI) on Tuesday and Wednesday, respectively.

USD/JPY 4-hour chart

Technical Analysis:

The 200-period Simple Moving Average (SMA) is edging higher at 156.15, and the USD/JPY pair holds above it, sustaining a positive tone. The upward SMA slope supports buyers. The Moving Average Convergence Divergence (MACD) histogram stands in positive territory, indicating the MACD line above the Signal line and a bullish bias. The RSI at 66 is firm but below overbought, leaving room for continuation if momentum persists.

The long-term SMA keeps dips supported; a close back beneath 156.15 would weaken the near-term outlook for the USD/JPY pair. The recent contraction in the positive MACD histogram from 0.13 to 0.08 hints at moderating upside momentum, though it remains above zero. RSI easing from prior overbought readings aligns with a steadier, rather than accelerating, advance, while the overall bias stays constructive as long as the 200 SMA holds.

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