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USD/JPY Price Forecast: Reverses dovish BoJ-inspired gains; bears regain control ahead of Fed

  • USD/JPY attracts fresh sellers following an intraday uptick and dives to a multi-day low.
  • Trade-related uncertainties and geopolitical risks boost demand for the safe-haven JPY.
  • The divergent BoJ-Fed expectations contribute to the fall ahead of the FOMC meeting.

The USD/JPY pair turns lower for the third consecutive day on Tuesday and retreats over 100 pips from the daily peak, around the 144.25-144.30 region, hitting a fresh daily low during the early European session. With the latest leg down, spot prices have now reversed gains registered after the Bank of Japan's (BoJ) dovish pause last Thursday. In fact, the BoJ slashed its growth and inflation forecasts, forcing investors to scale back their bets for the next rate hike in June or July. The central bank, however, said that it remains committed to raising rates further if the economy and prices move in line with its forecasts. Moreover, signs of broadening inflation in Japan and prospects of sustained wage hikes keep the door open for further BoJ policy normalization in 2025. Apart from this, sustained safe-haven demand benefits the Japanese Yen (JPY), which, along with the subdued US Dollar (USD) demand, exerts pressure on the currency pair.

Speaking to reporters aboard Air Force One on Sunday, US President Donald Trump hinted at possible trade agreements with certain countries as early as this week. Trump had also signaled that he is open to lowering massive tariffs imposed on China. Meanwhile, China's Commerce Ministry said last Friday that it was evaluating the possibility of trade talks with the US. This, in turn, adds to the optimism over the potential de-escalation of the tit-for-tat tariff war between the world’s two largest economies. Market participants, however, remain worried about Trump's rapidly shifting stance on trade policies and their impact on the global economy. Adding to this, persistent geopolitical risks stemming from the protracted Russia-Ukraine war and conflicts in the Middle East keep investors on edge. This is evident from a generally weaker tone around the equity markets, which, in turn, provides a modest lift to traditional safe-haven assets, including the JPY.

The USD (USD), on the other hand, continues with its struggle to attract any meaningful buyers amid the heightened economic uncertainty on the back of Trump's tariffs. This, to a larger extent, overshadows diminishing odds for a more aggressive policy easing by the Federal Reserve (Fed). In fact, traders trimmed bets that the Fed will cut rates in June following the better-than-expected release of the US jobs data on Friday. Furthermore, the Institute for Supply Management (ISM) survey showed on Monday that the growth in the US services sector picked up in April. The incoming US macro data points to a still resilient economy and eases recession fears. The USD bulls, however, seem reluctant and opt to wait for more cues about the Fed's rate-cut path before positioning for the next leg of a directional move. Hence, the market focus will remain glued to the outcome of the crucial two-day FOMC meeting starting later this Tuesday.

The US central bank is scheduled to announce its decision on Wednesday and is widely expected to leave interest rates steady. Meanwhile, investors will closely scrutinize the accompanying policy statement and Fed Chair Jerome Powell's remarks at the post-meeting press conference amid bets for two quarter-point rate reductions by the end of this year. Nevertheless, this will still mark a big divergence in comparison to expectations that the BoJ will hike interest rates again in 2025. This, in turn, should continue to act as a tailwind for the lower-yielding JPY and suggest that the path of least resistance for the USD/JPY pair is to the downside.

USD/JPY 4-hour chart

Technical Outlook

Last week’s failure to find acceptance above the 50% Fibonacci retracement level of the March-April downfall and rejection near the 200-period Simple Moving Average (SMA) on the 4-hour chart favors bearish traders. The subsequent slide below the 143.00 mark on Tuesday and negative oscillators on daily/hourly charts validate the near-term negative outlook for the USD/JPY pair. Hence, some follow-through downfall towards the next relevant support near the 142.65 area, en route to the 142.00 mark, looks likely a distinct possibility. The downward trajectory could extend further towards the 141.60-141.55 intermediate support en route to the 141.00m round figure.

On the flip side, any attempted recovery back above the 143.00 mark might now confront stiff resistance near the 143.65 area. This is followed by the 144.00 round figure and the Asian session high, around the 144.25-144.30 region. A sustained strength beyond the latter might trigger a short-covering rally and allow the USD/JPY pair to reclaim the 145.00 psychological mark.

Author

Haresh Menghani

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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