USD/JPY Price Forecast: Rebounds sharply amid declining JGB yields; not out of the woods yet

The USD/JPY pair stages a solid intraday recovery from a fresh monthly low touched earlier this Tuesday and rallies over 150 pips from the 142.00 neighborhood. Yields on super-long Japanese government bonds (JGBs) tumbled amid reports that Japan's Ministry of Finance (MOF) might reduce the sale of these bonds. Apart from this, the latest optimism led by US President Donald Trump's decision to delay the imposition of tariffs on the European Union (EU), weighs heavily on the Japanese Yen (JPY).  This, in turn, triggers aggressive short-covering around the currency pair amid a goodish US Dollar (USD) rebound from the vicinity of over a one-month low set on Monday.

Any meaningful USD appreciation, however, seems elusive in the wake of concerns about the deteriorating US fiscal condition and dovish Federal Reserve (Fed) expectations. In fact, US President Donald Trump's dubbed “Big, Beautiful Bill”, if passed in the the Senate this week, could add an estimated $4 trillion to the federal primary deficit over the next decade and worsen the US budget deficit at a faster pace than previously expected. Furthermore, market participants seem convinced that the Fed will eventually step in to support economic growth and are pricing in the possibility of at least two 25 basis point (bps) rate cuts by the end of this year amid signs of easing inflationary pressures.

Meanwhile, expectations that the Fed will stick to its easing bias mark a big divergence in comparison to bets that the BoJ will hike interest rates again in 2025, bolstered by strong domestic inflation data. Against the backdrop of strong consumer inflation figures released last week, Japan's Services Producer Price Index (PPI) – a leading indicator of service-sector inflation – rose 3.1% from a year earlier in April. This pointed to the broadening of inflation in Japan and kept alive expectations for further BoJ policy tightening. Apart from this, the trade caution and geopolitical risks might hold back the JPY bears from placing aggressive bets, which, in turn, should cap further gains for the USD/JPY pair.

Traders now look to the US macro data – Durable Goods Orders and Conference Board's Consumer Confidence Index – for some impetus later during the North American session. The focus, however, will remain glued to the release of the FOMC meeting minutes on Wednesday, which might provide cues about the Fed's future rate-cut path and influence the USD. Apart from this, traders this week will take cues from other important US economic releases – the Prelim Q1 GDP print and the Personal Consumption Expenditure (PCE) Price Index on Thursday and Friday, respectively. Apart from this, the Tokyo CPI print on Friday should help in determining the next leg of a directional move for the USD/JPY pair.

USD/JPY 4-hour chart

Technical Outlook

From a technical perspective, a sharp intraday recovery lifts spot prices beyond the 23.6% Fibonacci retracement level of the leg-down witnessed over the past two weeks or so. However, it will still be prudent to wait for some follow-through buying beyond the 200-period Simple Moving Average (SMA) on the 4-hour chart before placing fresh bullish bets. The USD/JPY pair might then surpass the 144.00 mark and test the next relevant hurdle near the 144.35-144.40 horizontal zone. This is closely followed by the 38.2% Fibo. retracement level, around the 144.65 region, above which spot prices could reclaim the 145.00 psychological mark and accelerate the positive move towards the 145.40 area, or the 50% Fibo. retracement level.

On the flip side, the 143.00 round figure might now protect the immediate downside ahead of the 142.55-142.45 horizontal zone and the 142.10 area, or the intraday swing low. A convincing break below the latter and acceptance below the 142.00 mark will be seen as a fresh trigger for bearish traders and drag the USD/JPY pair further towards the 141.60-141.60 intermediate support en route to the sub-141.00 level. The downward trajectory could extend further towards the 140.45 region before spot prices retest the year-to-date trough, below the 140.00 psychological mark touched in April.