Japanese Yen Set to Strengthen Against Weakening USD

• The Japanese Yen gains momentum after a slight drop the previous day.
• The USD hits a more than three-year low, adding downward pressure on USD/JPY.
• Market participants await crucial inflation data from Japan and the US this Friday.

The Japanese Yen (JPY) is strengthening against a generally weaker US Dollar (USD), approaching the week’s high during Thursday’s Asian trading session. The market anticipates another interest rate increase from the Bank of Japan (BoJ) due to expanding inflationary pressures in Japan. Conversely, the Federal Reserve’s (Fed) recent forecasts indicate potential rate cuts by year-end, highlighting a stark policy divergence with the BoJ, which bolsters the JPY’s performance against the USD.

Additionally, US President Donald Trump’s recent hints at possibly replacing Fed Chair Jerome Powell raise concerns about the Fed’s autonomy, overshadowing any positive sentiment from the Israel-Iran ceasefire and negatively impacting global risk appetite, further enhancing the JPY’s appeal as a safe-haven. Consequently, the USD has dropped to its lowest level since March 2022, driven by the Trump-Powell conflict and expectations of further rate reductions by the Fed, pushing the USD/JPY pair down to the mid-144.00s as markets anticipate upcoming US economic data.

Japanese Yen remains strong amid expectations of a hawkish BoJ and a weakening USD

• The Bank of Japan has indicated a gradual move away from its longstanding ultra-loose monetary policy, planning a slower reduction in bond purchases starting fiscal 2026. Meanwhile, consistent increases in inflation metrics in Japan support the likelihood of further rate hikes by the BoJ.
• Japan’s core inflation has consistently exceeded the BoJ’s 2% target for over three years, reaching a two-year peak in May. Additionally, Japan’s Corporate Services Producer Price Index, a precursor to consumer inflation, has consistently shown a year-over-year increase of over 3% for several months.
• Fed Chair Jerome Powell, during his Congressional testimony, acknowledged that recent inflation figures have been moderate but cautioned that new tariffs could alter this trend. Powell indicated that the Fed would likely maintain its current policy stance until the effects of these tariffs on consumer prices are clearer.
• Trump’s ongoing criticism of Powell and his consideration of replacing him have intensified, with Trump noting that he has several candidates in mind for the Fed’s top position.
• Market bets on the Fed reducing rates by at least 50 basis points by year-end continue, with a roughly 20% chance of a rate cut as early as July, pushing the USD to a significant low and the USD/JPY pair nearing the week’s lowest levels during the Asian session.
• The ceasefire between Israel and Iran is currently holding, which may support global risk sentiment and limit the appeal of traditional safe-havens like the Japanese Yen. Attention is now turning to the final Q1 GDP release, with a focus on upcoming inflation data from Japan and the US on Friday.

USD/JPY tests key support levels; bearish outlook persists

The recent downturn before reaching the 146.00 level and a subsequent dip below the 200-period Simple Moving Average (SMA) on the 4-hour chart, currently near the 144.70-144.65 area, signals a potential acceleration in the USD/JPY pair’s decline towards the 144.00 mark, possibly extending to the 143.70-143.65 zone before testing sub-143.00 levels.

Conversely, any recovery attempts above the 145.00 psychological threshold are likely to face resistance near the 145.25-145.35 area, with the 146.00 level acting as a critical pivot point. If breached, it could tilt the near-term outlook in favor of bulls, potentially driving the pair towards the 146.65-146.70 area and beyond to the 147.00 mark, with further momentum possibly reaching the 147.45-147.50 barrier before attempting to surpass the 148.00 level.