Written by: Rania Gule, Senior Market Analyst at XS.com – MENA
The USD/JPY pair is moving within a fluctuating range near support at the lower boundary of a temporary downward price channel, trading at 147.95 at the start of Thursday’s session. This reflects the balance between conflicting factors influencing both currencies. On one hand, the U.S. dollar is under pressure due to expectations of Federal Reserve interest rate cuts, while the Japanese yen benefits from increasing expectations that the Bank of Japan may continue tightening its monetary policy. In my view, this divergence in monetary policies between the two countries has narrowed the yield gap, providing support for the yen and pushing the dollar downward.
Investor concerns persist regarding former U.S. President Donald Trump’s trade policies, particularly after his threats to impose new tariffs, which have heightened volatility in financial markets. Given this backdrop, investors are strengthening their positions in safe-haven assets like the Japanese yen, especially if uncertainty surrounding trade tensions and their impact on the global economy increases. However, the broader shift toward riskier assets, fueled by market optimism about global economic recovery, may partially limit the yen’s gains.
On the other hand, the Bank of Japan continues its path toward monetary tightening, particularly as inflation remains above target levels for longer than expected. Expectations of an interest rate hike by the Japanese central bank have kept government bond yields elevated, boosting demand for the yen. However, markets remain cautious, as the Bank of Japan has yet to announce any major policy shifts, leaving investors on standby for any future statements that could clarify its direction.
Meanwhile, the Federal Reserve appears to be taking an opposite approach. Market bets have increased that the Fed will cut interest rates multiple times this year to counter a potential economic slowdown. Additionally, recent U.S. inflation data came in weaker than expected, reinforcing expectations that the Fed may be forced to ease its tight monetary policy in the coming period. This scenario puts pressure on the U.S. dollar, preventing it from making strong gains against the yen, especially if upcoming economic data further supports this outlook.
As market volatility persists, investors closely watch key U.S. economic data, such as the Producer Price Index (PPI), for additional clues about the Fed’s future path. Weaker-than-expected data could increase pressure on the dollar, giving the yen more room to recover. Conversely, stronger-than-expected U.S. data could limit the dollar’s downside and support some recovery in the USD/JPY pair.
Based on these factors, I believe the outlook for USD/JPY will continue to depend on the balance between the monetary policies of both central banks and developments in geopolitical and trade conditions. As markets continue to price in Fed rate cuts and potential BoJ tightening, the overall trend still favors the yen—unless surprises prompt markets to reassess these expectations.