Written by: Rania Gule, Senior Market Analyst at XS.com – MENA
The USD/JPY pair has experienced a significant movement in recent trading sessions, climbing more than 150 pips from its three-week low of 146.220 before retreating today to trade around 147.151, driven by a combination of economic factors that have brought the U.S. and Japanese economies closer together. In my view, what occurred is not merely a short-term speculative rebound but rather reflects shifts in monetary policy expectations for both countries, within a changing global inflation environment and renewed debate over interest rate paths.
Recent U.S. data played a crucial role in boosting demand for the dollar, with July’s Producer Price Index coming in well above expectations, marking the largest monthly increase since June 2022. This has reignited the belief that price pressures in the U.S. have not yet receded enough to justify a rapid easing of monetary policy. From an economic perspective, this suggests the Federal Reserve may be compelled to keep interest rates higher for longer and could slow the pace of monetary easing that markets had begun to anticipate. In my opinion, this reading increases the likelihood of repricing the U.S. yield curve to higher levels, boosting the dollar’s appeal against the yen and other low-yielding currencies.
U.S. labour market data added further momentum to these expectations, showing declines in both initial and ongoing jobless claims, indicating that the labour market remains notably resilient. I believe that the continued strength in employment means wage pressures will persist, in turn fuelling inflationary pressures, leaving the Fed facing a delicate balancing act between controlling inflation and avoiding stifling growth. In my assessment, this fine balance will make the central bank more cautious about cutting rates in the near term.
On the Japanese side, the picture is equally complex. Second-quarter GDP was significantly stronger than expected, giving the Bank of Japan more room to consider ending its era of ultra-low interest rates. Overall inflation remains steady above 3%, well above the bank’s 2% target, yet paradoxically, the BOJ continues to rely on “core inflation” measures that may underestimate actual price pressures. In my view, this cautious monetary stance is losing its justification in light of the latest data, especially if paired with stronger-than-expected economic growth.
Currently, market expectations for an October BOJ rate hike are no longer marginal but have become a scenario with considerable weight. Statements from some international officials, such as the U.S. Treasury Secretary, reflect a growing perception that the BOJ is lagging in its response, and any move towards tightening could be quite sharp to compensate for the delay. In my estimation, if inflation and wage data persist on their current trajectory, the BOJ could be forced to act before the year is out, even if only gradually.
From a capital flow perspective, any rate hike in Japan would reduce the attractiveness of the carry trade, which relies on borrowing in yen to invest in higher-yielding assets, potentially boosting the yen over the medium term. However, in the short term, the dollar remains supported by the wide yield differential and the momentum generated by U.S. data, meaning any yen appreciation will be limited and dependent on clear signals from the BOJ.
In my opinion, the market is presently in a sensitive phase, with prices caught between a U.S. economy strong enough to support the dollar and the possibility of a Japanese policy shift that could later give the yen a boost. I believe that in the short term, the advantage still lies with the dollar as long as expectations for high U.S. rates persist, but any official indication from the BOJ about a rate hike could quickly alter the balance.
In conclusion, we may be facing a monetary stand-off between the world’s two largest economies in terms of influence on currency markets, where readings on inflation, growth, and monetary policy are interconnected to create a complex equation for USD/JPY. From a strategic perspective, I see the short term continuing to feature the dollar testing higher levels, perhaps towards 148.50 or even 149.00, while the medium term will depend on how swiftly the BOJ adjusts its policy and how well the U.S. economy withstands high interest rates. In all cases, any trader or investor in this pair should interpret the macro picture with caution, closely monitoring upcoming data, as the turning point could arrive faster than markets anticipate.
Technical Analysis of ( USDJPY ) Prices:
The four-hour chart for the USD/JPY pair shows that the price is currently trading around the 147.10 level after a previous rebound from a low near 146.20. The recent price action indicates weakening bullish momentum, with the pair failing to hold above the 0.33 Fibonacci retracement level, suggesting the potential for selling pressure to return if buyers cannot quickly regain control. The Stochastic oscillator is turning downward from overbought territory, supporting a short-term correction or bearish scenario.
The “Golden Zone” between the 0.5 and 0.66 Fibonacci retracement levels (around 148.50–149.00) remains a potential target if the price manages to break the current resistance, as this range aligns with previous highs and represents a strong supply area likely to see profit-taking. However, a break below the nearby support at 146.80 would increase the likelihood of continuing the downward move toward the previous low, especially with a potential pattern indicating the completion of the corrective wave. From a technical standpoint, any upside before reaching this zone is likely to remain corrective unless it is broken and sustained above.
If selling pressure persists, a break below 146.20 would send the price toward the 145.00–144.50 area, a key low that corresponds with the 100% Fibonacci extension of the visible pattern. In the alternative scenario, a move back above 147.80 and then 148.50 would support a test of the “Golden Zone,” where buyers would need a strong breakout to confirm the continuation of the bullish trend. The current technical focus, therefore, is on whether the pair will hold nearby support levels or push toward retesting the major supply areas above.
Support levels: 146.80 – 146.20 – 145.00
Resistance levels: 147.80 – 148.50 – 149.00