- The yen has fallen further against the dollar on concerns about Trump’s trade tariffs.
- More bets on Bank of Japan rate hikes and risk aversion will limit losses in the safe-haven yen.
- The narrowing of the US-Japan interest rate gap may also limit the direction of the USD/JPY pair.
The Japanese Yen (JPY) has remained weak against the US Dollar for the second consecutive day, retreating further from the one-month high it reached last week. One of the key factors driving this decline is the uncertainty surrounding the economic impact of US President Donald Trump’s trade tariffs. However, the JPY’s decline has been somewhat tempered by growing expectations that the Bank of Japan (BoJ) will raise interest rates again.
The BoJ’s recent Summary of Opinions revealed that policymakers are considering further interest rate hikes, fueled by a rise in Tokyo’s core inflation at its fastest pace in nearly a year. This has helped maintain expectations for continued tightening of BoJ policy. In addition, the narrowing interest rate gap between Japan and other global economies, coupled with a risk-averse market sentiment, could provide some support for the JPY and limit its depreciation further.
Japanese Yen Bulls Maintain Control Amid Expectations of Further BoJ Rate Hikes
- US President Donald Trump signed an order on Saturday to impose 25% tariffs on Canadian and Mexican imports and 10% on goods from China starting on Tuesday.
- Canada’s Prime Minister Justin Trudeau, Mexico’s President Claudia Sheinbaum, and China’s foreign ministry were quick to respond with the upcoming tit-for-tat moves.
- The US Dollar rallies across the board and advances back closer to over a two-year high touched in January, which assists the USD/JPY pair to build on Friday’s move up.
- The Bank of Japan’s Summary of Opinions released earlier this Monday showed that policymakers discussed the likelihood of raising rates further at the January meeting.
- BoJ board members reiterated that it will be necessary to continue hiking rates, if economic activity and prices remain on track, though it does little to boost the Japanese Yen.
- Japan’s Finance Minister Katsunobu Kato said that the government intends to monitor the impact of Trump’s new tariffs on its currency amid worries about the fallout.
- The US-Japan yield differential hovers near a multi-week low. This, along with the risk-off impulse, could help limit a further JPY depreciation in the near term.
- Traders now look forward to this week’s important US macro releases scheduled at the start of a new month, starting with the ISM Manufacturing PMI later today.
- The focus, however, will remain glued to the US monthly employment data – popularly known as the Nonfarm Payrolls (NFP) report due for release on Friday.
USD/JPY Must Break Above 156.25, Last Week’s High, to Strengthen Bullish Outlook
From a technical standpoint, last week’s solid rebound from the 50% retracement level of the December-January rally, followed by a move higher, supports a bullish outlook. However, any further upside beyond the 156.00 level could face resistance near the previous week’s swing high, around 156.25. A sustained break above this level could ignite a fresh short-covering rally, pushing the USD/JPY pair towards the 156.70-156.75 area, and potentially towards the 157.00 psychological level and the 157.60 resistance. Momentum could continue to carry the price toward the 158.00 level, where further gains could target the multi-month peak of 158.85-158.90, reached on January 10.
On the downside, the 155.00 level is expected to provide immediate support, ahead of the 154.55-154.50 zone and the 154.00 round figure. Below that, the January low near 153.70, touched last Monday, would be key. A decisive break below this level could signal a shift towards a bearish trend, pushing USD/JPY lower, with potential support around 153.30 and eventually targeting the 153.00 mark.