By Rania Gule, Senior Market Analyst at XS.com – MENA
In light of the recent decline in the USD/JPY pair to the 155.90 level, keeping it close to a new weekly low, the current outlook for the pair appears complex and burdened by contradictory monetary-policy signals between the Federal Reserve and the Bank of Japan. From my perspective, this decline is not merely a short-term move but a reflection of deeper shifts in global monetary sentiment—specifically the narrowing gap between the two countries’ policies, which has already begun translating into accumulated selling pressure on the pair.
Market behavior during Thursday’s session is clear: the entry of new sellers reflects a lack of confidence in the dollar’s ability to maintain its momentum, especially after failing to capitalize on the modest rebound from 155.65, the lowest level in a week. With spot prices approaching 155.90 again, I believe the bearish momentum remains dominant, and that any attempts to recover are limited, as the market now views every rally as a selling opportunity rather than a signal of reversal. Such behavior typically emerges when traders become convinced that the broader trend has changed or is undergoing a substantial repricing phase.
A key driver of this pressure is the yen itself, which has begun regaining some strength supported by expectations of official intervention to curb its decline, in addition to the anticipated path of interest-rate hikes by the Bank of Japan. As an economist, I see that the market is not waiting for intervention in and of itself, but is reacting to the “signal” of preparedness to act, combined with the fact that the Bank of Japan has become increasingly explicit in preparing participants for a potential rate hike next month, according to Reuters. These developments make the yen more attractive in the short term because they narrow the long-standing gap between Japan’s ultra-loose monetary policy and that of other major central banks. Therefore, the pressure on USD/JPY stems from a fundamental reassessment of yield expectations rather than a simple reaction to isolated news.
Meanwhile, the Federal Reserve is heading in the opposite direction, with cautious expectations leaning toward easing policy by the end of the year. U.S. Producer Price Index (PPI) data reinforced this trend by showing further signs of inflation slowdown, pushing investors to increase their expectations of a rate cut—possibly at the December meeting. From my viewpoint, this mix—weak inflation conditions, dovish hints, and a relative loss of economic momentum—makes the dollar less capable of resisting downward pressures, especially against a currency like the yen that is awaiting a potentially historic policy shift. As such, the policy divergence between the two central banks leaves any dollar recovery against the yen limited and temporary.
Nevertheless, it is important to note that the yen is not operating in an ideal environment. Risks surrounding the Japanese economy—specifically its deteriorating fiscal position and widening budget deficit, along with Prime Minister Sanae Takaichi’s inclination toward expansive fiscal stimulus—represent factors that could weaken the yen as a safe haven and cap the pace of its gains. In my assessment, this is what prevents the current decline in USD/JPY from turning into a sharp or extended collapse. Markets are treating the yen with a mix of tactical optimism and strategic caution, meaning its strength is currently tied more to monetary conditions than to the underlying resilience of Japan’s economic fundamentals.
This backdrop coincides with relatively low trading volumes due to the U.S. Thanksgiving holiday, reducing the reliability of some short-term moves but without altering the broader trend. Structural dollar weakness, shifting expectations for the Bank of Japan, and declining global risk appetite together create an environment clearly favoring sellers. Based on my reading of recent flows, I believe investors have become increasingly convinced that the 158–160 range previously targeted by speculators has become out of reach under current conditions, with the more plausible scenario being a test of new support levels if monetary policies remain unchanged.
Therefore, I believe the USD/JPY pair is entering a phase in which long-ignored market imbalances are being reset. If the Federal Reserve maintains its dovish signals and the Bank of Japan continues its hawkish guidance, the bearish trend will persist. However, the pace of decline will depend on the extent of Japan’s readiness for actual intervention versus relying solely on signaling. In my view, a clear break below 155.50 could support further downside, while any rebound above 157.50 is likely to remain limited without a material shift in U.S. economic data.
In conclusion, what we are witnessing is not a transient fluctuation but the beginning of a transitional phase in the USD/JPY trajectory, where fundamental factors are overtaking technical ones, and monetary policies return to being the primary driver. From my perspective, the yen currently holds a tactical advantage, though this advantage may erode quickly if it is not accompanied by genuine improvement in Japan’s economic outlook. Until then, the pair will continue to face dual pressures—intervention concerns and a softening Federal Reserve tone—as the dominant theme in the coming weeks.