USD/JPY Price Forecast: Defends ascending channel support; not out of the woods yet

The USD/JPY pair builds on the overnight bounce from the 154.75 area, or its lowest level since December 19 and attracts some follow-through buying on Wednesday. The momentum, however, falters near the 156.00 mark during the early European session amid the growing acceptance that the Bank of Japan (BoJ) will hike interest rates on Friday. Against the backdrop of hawkish remarks from BoJ officials, optimism that rising wages will help Japan stay on track to meet the 2% inflation target and allow the central bank to tighten its monetary policy further. 

In fact, the BoJ has repeatedly said that sustained, broad-based wage hikes are a prerequisite to raising short-term rates. Adding to this, the head of Japan's largest trade union Rengo – Tomoko Yoshino – agrees with BoJ that there is wage rise momentum. Moreover, government sources said that Japan's Prime Minister Shigeru Ishiba will emphasize strong wage growth surpassing inflation as a key element of his economic revival strategy in an upcoming policy speech to parliament. This continues to act as a tailwind for the JPY and caps the upside for the USD/JPY pair. 

Meanwhile, the initial market reaction to US President Donald Trump's threatened tariffs turned out to be short-lived in the absence of any specific details. This, along with the optimism over the Israel-Hamas ceasefire agreement and hopes that Trump might relax curbs on Russia in exchange for a deal to end the Ukraine war, remains supportive of the risk-on mood and undermines the safe-haven JPY. Apart from this, the emergence of some US Dollar (USD) buying remains supportive of the bid tone surrounding the USD/JPY pair. 

The USD Index (DXY), which tracks the Greenback against a basket of currencies, stages a modest recovery from a two-week low retesting on Tuesday amid a pickup in the US Treasury bond yields. That said, bets that the Federal Reserve (Fed) will lower borrowing costs twice this year could act as a headwind for the US bond yields and the buck. Furthermore, the divergent BoJ-Fed policy expectations warrant some caution before confirming that the USD/JPY pair has formed a near-term bottom and positioning for any further gains. 

Traders might also refrain from placing aggressive directional bets and opt to wait on the sidelines ahead of the highly-anticipated two-day BoJ monetary policy meeting starting Thursday. The outcome will play a key role in influencing the near-term JPY price dynamics and provide some meaningful impetus to the USD/JPY pair. Nevertheless, the aforementioned fundamental backdrop seems tilted in the JPY bulls, suggesting that any subsequent move up in the currency pair could attract fresh sellers and is likely to remain capped.

USD/JPY daily chart

Technical Outlook

From a technical perspective, spot prices showed some resilience below the 155.00 psychological mark on Tuesday and bounced off support marked by the lower end of over a three-month-old ascending channel. The subsequent move up, along with the fact that oscillators on the daily chart are yet to gain any meaningful negative traction, makes it prudent to wait for a sustained break below the trend-channel support before positioning for any further depreciating move. The USD/JPY pair might then accelerate the fall towards the 154.50-154.45 intermediate support en route to the 154.00 round figure, mid-153.00s and the 153.00 mark. 

On the flip side, momentum beyond the overnight swing high, around the 156.25 region, could face resistance near the weekly top, around the 156.55-156.60 area touched on Monday. Some follow-through buying has the potential to lift the USD/JPY pair towards the 157.00 mark. The recovery could extend further towards the 157.25-157.30 area en route to the 157.60 region and the 158.00 round figure. A sustained strength beyond the latter could set the stage for a move towards retesting the multi-month peak, around the 159.00 neighborhood touched on January 10.