The Japanese Yen (JPY) continues to trade with a negative bias against the recovering US Dollar (USD), marking the second consecutive day of decline. The USD/JPY pair is nearing the significant 156.00 level, which aligns with the weekly peak. Without substantial fundamental triggers in play, this downturn appears to stem from positioning trades as market participants prepare for the upcoming Bank of Japan (BoJ) policy meeting scheduled for Friday.
Attention is particularly keen on BoJ Governor Kazuo Ueda’s post-meeting press conference, anticipated to provide critical insights into the future direction of monetary policy, which may offer fresh momentum for the Yen. Meanwhile, there is a growing sentiment that the BoJ is likely to maintain its path of policy normalization, potentially providing a boost to the Japanese currency.
Contrastingly, the US Dollar is expected to face challenges in attracting sustained buying interest amid increasing speculation regarding potential interest rate cuts by the Federal Reserve (Fed). This dynamic creates a notable divergence from the hawkish expectations surrounding the BoJ, which is expected to enhance support for the Yen and limit losses in the USD/JPY pair.
As traders adopt a cautious stance ahead of the two-day BoJ meeting starting Thursday, aggressive bets on the Yen are being held back. Analysts anticipate that the central bank may increase interest rates to 0.75%, setting the stage for the highest rates in three decades. Reports suggest that the BoJ will reiterate its commitment to continue raising rates, although the pace would depend on economic responses.
Investor sentiment has shifted, with a trend of selling shorter-dated Japanese government bonds emerging in light of the hawkish BoJ outlook. Additionally, discussions around the size of government spending for the next fiscal year have raised concerns about Japan’s fiscal health, contributing to an uptick in yields on benchmark government bonds, marking their highest levels since June 2007.
This narrowing yield differential against other major economies offers some support to the Yen during the Asian trading session. Despite the US Dollar maintaining prior recovery gains, the upside appears constrained, with markets factoring in the likelihood of two further rate cuts by the Federal Reserve by 2026. The potential appointment of a Trump-aligned Fed chair, who is expected to be dovish, adds another layer of complexity to the outlook for the Dollar.
Traders remain hesitant to make significant bets as they await the release of the latest US consumer inflation statistics, scheduled for later today. This key data will likely provide insights on the Fed’s future rate path and could influence both the Dollar’s performance and the direction of the USD/JPY pair.
In technical terms, a breakout above the 100-hour Simple Moving Average (SMA), coupled with positive oscillator signals on both hourly and daily charts, supports the case for a potential upward movement in the USD/JPY pair. However, market participants may prefer to wait for confirmed strength beyond the 156.00 mark before making additional bullish investments. If this barrier is surpassed, the positive movement could extend towards the monthly high of around 157.00, with intermediate resistance expected near the 156.55-156.60 range.
Conversely, should the market reverse, the 100-hour SMA, currently acting as support around the 155.30 zone, is likely to cushion the immediate downside, with the next psychological concern resting at the 155.00 mark. A significant drop below this point could trigger technical selling and expose the price to further declines towards the 154.35-154.30 range or the monthly swing low reached on December 5. Further downturns could lead to a breach of the 154.00 level, which would be seen as a new trigger for bearish traders, opening the path for more pronounced losses.
