Japanese Yen rebounds from one-week low against USD; lacks follow-through ahead of FOMC minutes

The Japanese Yen (JPY) bounces off over a one-week trough touched against its American counterpart earlier this Wednesday, though the uptick lacks follow-through. Investors now seem convinced that the Bank of Japan (BoJ) will continue raising interest rates amid the broadening inflation in Japan. Furthermore, the uncertainty over US President Donald Trump’s tariff policies and geopolitical risks contribute to limiting losses for the safe-haven JPY.

However, a generally positive risk tone is holding back traders from placing aggressive bullish bets around the JPY. The US Dollar (USD), on the other hand, draws support from Tuesday's mostly upbeat US macro data and acts as a tailwind for the USD/JPY pair. Meanwhile, bets that the Federal Reserve (Fed) will cut rates further in 2025 marks a big divergence in comparison to hawkish BoJ expectations, which caps the USD and favors the JPY bulls.

Japanese Yen draws some support from rising BoJ rate hike bets

• Japan’s Finance Minister Shunichi Kato said this Wednesday that the government is concerned about the recent spike in yields and will closely monitor bond market situations. This comes after Reuters reported on Tuesday that Japan's Ministry of Finance will consider tweaking the composition of its bond program for the current fiscal year, which could involve cuts to its super-long bond issuance.
• Meanwhile, Bank of Japan Governor Kazuo Ueda said that the outlook remains uncertain as tariff negotiations between the US and Japan are still ongoing. Ueda added that swings in short-term, and medium-term interest rates have bigger impacts on economic activities and that the central bank will closely monitor the bond market. This, along with the latest trade optimism, undermines the Japanese Yen.
• US President Donald Trump announced an extension of the deadline for imposing 50% tariffs on European Union imports until July 9, providing a strong boost to the global risk sentiment. This is seen as another factor undermining demand for the safe-haven JPY, though the uncertainty around Trump’s trade policies remains. This, along with hawkish BoJ expectations, helps limit deeper JPY losses.
• BoJ officials recently showed a willingness to hike interest rates again if the economy and prices improve as projected. Adding to this, the incoming data pointed to a broadening inflation in Japan and backs the case for further policy tightening by the central bank. Investors, however, now seem convinced that BoJ policymakers will assess tariffs and trade flows before making the next policy move.
• In contrast, traders have been pricing in the possibility of at least two 25 basis point rate cuts by the Federal Reserve in 2025 amid signs of easing inflationary pressure in the US. Moreover, concerns that the US budget deficit could worsen at a faster pace than previously expected on the back of US President Donald Trump's dubbed “Big, Beautiful Bill” act as a headwind for the US Dollar.
• Russia has refused to engage in ceasefire talks and its forces have made gains in Ukraine's northeast after the deadliest drone and missile attacks since the full-scale invasion in February 2022. Meanwhile, Hamas reportedly agreed to the US ceasefire proposal for Gaza, though a US official said the deal being discussed was “unacceptable” and “disappointing”. This keeps geopolitical risks in play.
• Investors now look forward to the release of FOMC meeting minutes for cues about the future rate-cut path, which will play a key role in influencing the USD price dynamics and provide some impetus to the USD/JPY pair. The focus will then turn to the Prelim US Q1 GDP on Thursday, followed by the Tokyo CPI print and the US Personal Consumption Expenditure (PCE) Price Index on Friday.

USD/JPY fails to capitalize on its recovery beyond 38.2% Fibo. hurdle

The overnight breakout above the 143.65-143.75 confluence hurdle – comprising the 200-period Simple Moving Average (SMA) on the 4-hour chart and the 23.6% Fibonacci retracement level of the recent downfall from the monthly peak – could be seen as a key trigger for the USD/JPY bulls. Moreover, positive oscillators on the said chart support prospects for a further intraday appreciating move. However, a lack of follow-through beyond the 38.2% Fibo. retracement level and the fact that technical indicators on the daily chart are yet to confirm the constructive outlook warrant caution. Hence, any subsequent move up is likely to face stiff resistance and remain capped near the 145.00 psychological mark. This is followed by the 50% retracement level, around the 145.40 region, which if cleared should pave the way for additional gains.

On the flip side, the 144.00 mark, followed by the 143.75-143.65 confluence resistance breakpoint, could offer some support to the USD/JPY pair. A convincing break below the latter will suggest that the corrective bounce has run out of steam and drag spot prices back to the 143.00 round figure. Some follow-through selling might expose the overnight swing low, around the 142.10 area, or the monthly trough.