The USD/JPY currency pair is experiencing downward pressure, trading around 147.73 after an earlier peak of 148.38, marking a two-week high. Recent movements have seen the U.S. Dollar Index decline to 97.38, ending a three-day rally, which follows last week’s Federal Reserve cut of 25 basis points. Fed Chair Jerome Powell emphasized that future easing would be slow and contingent on data, while Fed Governor Stephen Miran expressed the need for further cuts, suggesting divisions within the Fed regarding the current policy stance.
In Japan, the Bank of Japan (BoJ) maintained its policy rate at 0.50%, but introduced signs of potential normalization by hinting at a gradual reduction of Exchange-Traded Fund (ETF) and Japan Real Estate Investment Trust (J-REIT) holdings. BoJ Governor Kazuo Ueda noted a trend toward 2% underlying inflation. However, with inflationary pressures from tariffs and food prices, the discussion around monetary policy tightening is intensifying. Two board members dissented, calling for an immediate rate hike to 0.75%, indicating an internal push for more aggressive measures, especially as sustainable wage growth becomes increasingly prioritized. Political dynamics are also at play, with Japan set to elect a new prime minister on October 4, which could significantly influence the BoJ’s direction.
The correlation between U.S. yields and the USD/JPY pair remains robust, with notable coefficients indicating strong relationships with Fed rate cut pricing (-0.75), 2-year yields (0.51), and 10-year yields (0.68). A rise in U.S. yields typically drives the pair higher, while declines pressure it downward. This week, upcoming auctions for 2-, 5-, and 7-year Treasury notes will test demand, following a notable drop in yields over the previous two months. A rebound in yields could propel USD/JPY above the resistance level of 149.00; however, lackluster demand could see it slide toward the support level of 145.48.
In Japan, core inflation remained unchanged at 1.6% year-over-year for August, though services prices continue to pose challenges. Attention will be on the release of the Tokyo Consumer Price Index (CPI) this Friday, which is a key indicator for national inflation trends. A robust CPI outcome could heighten expectations for a rate hike in October, thereby boosting demand for the yen. Conversely, weak data might deter bullish sentiment, allowing USD/JPY to retest resistance at 149.35 or even challenge the 151.00 mark.
From a technical perspective, the USD/JPY has formed a hammer candle at 145.90, indicative of strong buying interest. The Relative Strength Index (RSI) is above 50, and the MACD indicates a bullish momentum, suggesting buyers are active in defending support levels. The currency pair currently trades within a range of 146.50 to 149.00, with immediate resistance at 149.00. A breakout past this level could expose further resistance at 151.00, while a drop below 145.90 may shift focus to support levels around 144.40 and 142.42.
Looking ahead, market participants will be attentive to preliminary U.S. Purchasing Managers’ Indexes (PMIs) on Tuesday, followed by unemployment claims on Thursday, and crucial PCE inflation and consumption data on Friday. Multiple Fed officials, including Powell and Williams, are scheduled to speak throughout the week, and dovish signals could press USD/JPY back toward 145. On the Japanese front, the Services PMI and Tokyo CPI data will play pivotal roles in shaping expectations around the BoJ’s policy direction.
With USD/JPY currently at 147.73, the risk landscape remains delicate. The Fed’s cutting strategy hints at medium-term dollar weakness, while hawkish dissent within the BoJ suggests potential yen strength. Nevertheless, persistent U.S. yields continue to limit the pair’s downside. The stance on USD/JPY is to hold, with a bearish lean especially if Tokyo CPI comes in higher than expected or if Fed officials signal further aggressive cuts.
