Japanese Yen selling remains unabated; USD/JPY rallies to two-week top despite softer USD

The Japanese Yen (JPY) maintains its offered tone through the first half of the European session on Wednesday, pushing the USD/JPY pair to a nearly two-week high, closer to mid-156.00s in the last hour. Investors remain concerned about Japan's fiscal health under Prime Minister Sanae Takaichi's expansionary spending policy. Adding to this, domestic political uncertainty ahead of the February 8 snap election contributes to the JPY's underperformance against its American counterpart for the fourth straight day.

Meanwhile, traders remain on high alert amid the possibility of a coordinated Japan-US intervention to stem the JPY's weakness. Moreover, the Bank of Japan's (BoJ) gradual policy tightening narrative could limit deeper JPY losses. In contrast, bets that the US Federal Reserve (Fed) will cut interest rates two more times keep a lid on the recent US Dollar (USD) recovery from a four-year low. This could further act as a headwind for the USD/JPY pair, warranting some caution before positioning for any further move higher.

Japanese Yen remains depressed on the back of fiscal woes, political uncertainty

• Japan’s services sector growth accelerated at the start of 2026, with business activity expanding for the tenth consecutive month and at its fastest pace in almost a year. In fact, the Jibun Bank Services PMI climbed to 53.7 compared to 51.6 in December and consensus estimates for a reading of 53.4.
• The data signaled a more durable recovery in the services sector, which accounts for roughly 70% of Japan’s GDP. The market reaction, however, turns out to be muted amid nervousness over Japan’s fiscal outlook, fueled by Prime Minister Sanae Takaichi’s aggressive spending and tax cut plans.
• In fact, Takaichi has pledged to suspend the 8% consumption tax on food for two years as part of her campaign ahead of a snap lower house election on February 8. This puts the spotlight back on Japan's already strained public finances, which continue to undermine the Japanese Yen on Wednesday.
• The unusual rate check by the New York Federal Reserve recently was seen as the strongest signal to date that Japanese and US authorities were working together to stem the JPY's decline. This lowers the threshold for intervention and could limit JPY losses amid hawkish Bank of Japan bets.
• The Summary of Opinions from the BoJ's January meeting, released on Monday, showed that policymakers debated mounting price pressures from a weak JPY. Moreover, board members judged that further rate increases were appropriate over time, which could lend support to the JPY.
• The US Dollar, on the other hand, struggles to build on last week's recovery from a four-year low, bolstered by the nomination of Kevin Warsh as the next Fed chair. Even the passage of the government funding package to end a partial shutdown does little to provide any impetus to the USD.
• Traders now look forward to the release of the US ADP report on private-sector employment and the US ISM Services PMI. Apart from this, comments from influential FOMC members might influence the USD demand amid bets for two more rate cuts in 2026 and drive the USD/JPY pair.

USD/JPY could accelerate the positive move once the 156.50 confluence is cleared

Wednesday's move beyond the 156.00 mark comes on top of the overnight breakout through the 50% retracement level of the 159.13-152.06 downfall and favors the USD/JPY bulls. The Relative Strength Index (14) sits at 66.9, below overbought, aligning with a firm but maturing advance.

However, the Moving Average Convergence Divergence (MACD) histogram remains positive but is contracting, suggesting fading bullish momentum. The MACD line stands above the Signal line, and both hover around the zero line, reinforcing a cautious, transitional tone.

Hence, any subsequent move up is more likely to confront stiff resistance near the 156.51 confluence – comprising the 100-period Simple Moving Average (SMA) on the 4-hour chart and the 61.8% Fibonacci retracement level. A sustained break above the said barrier is needed to shift the near-term tone to the upside.

A clearance would open the 78.6% retracement at 157.62, while failure to overcome that barrier would leave the recovery vulnerable to renewed pullbacks. Meanwhile, the USD/JPY pair holds beneath the downward sloping 100-period SMA, suggesting that the move higher is likely to remain capped.

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