The Japanese Yen (JPY) continued to lose ground against the US Dollar (USD) during the Asian session on Wednesday, helping the USD/JPY pair extend its rebound from a one-week low. Despite concerns over the Russia-Ukraine conflict, easing fears of a full-scale nuclear war have boosted investor confidence, further undermining the Yen. Additionally, ongoing uncertainty about the timing of another interest rate hike by the Bank of Japan (BoJ) has contributed to the JPY’s weakness.
US President-elect Donald Trump’s policies, which are expected to stimulate economic growth and inflation, have led investors to believe that the Federal Reserve (Fed) may limit interest rate cuts. This, coupled with reduced safe-haven demand, has helped push US Treasury yields higher, supporting the USD and offering further momentum to the USD/JPY pair. However, fears of intervention in the foreign exchange markets could temper aggressive bearish bets on the Yen, preventing a significant appreciation of the currency pair.
Geopolitical Developments and BoJ’s Cautious Stance Weigh on the Yen
On Tuesday, Russian President Vladimir Putin approved changes to Russia’s nuclear doctrine, which came just days after US President Joe Biden authorized Ukraine to use long-range US missiles against military targets inside Russia. Despite the heightened tensions, Russian Foreign Minister Sergei Lavrov reassured that the country would do everything possible to avoid nuclear war. This reassured markets to some extent, easing demand for safe-haven assets like the JPY.
Meanwhile, Japan’s Ministry of Finance reported that the country’s exports rose by 3.1% in October, while imports grew by just 0.4%, resulting in a trade deficit of ¥461.2 billion. The BoJ, under Governor Kazuo Ueda, has signaled concerns about keeping borrowing costs too low for too long. While Ueda has hinted at the possibility of an interest rate hike, the timing remains unclear, adding to the uncertainty surrounding the JPY’s outlook.
US Dollar Remains Supported by Inflation Expectations and Fed’s Stance
Expectations that Trump’s policies will lead to higher inflation have contributed to a recent rise in US Treasury bond yields. Federal Reserve Bank of Kansas President Jeffrey Schmid noted that large fiscal deficits would not necessarily lead to inflation, as the central bank is prepared to manage it—potentially by raising interest rates. This has reinforced the USD’s upward momentum and kept a floor under the USD/JPY pair.
Investors are also awaiting speeches from key Federal Open Market Committee (FOMC) members later on Wednesday, which are expected to provide further insights into the Fed’s stance on interest rates. This will be a key factor in driving USD price dynamics and could offer additional support for the USD/JPY pair, especially in the absence of significant US macroeconomic data.
Technical Outlook: USD/JPY Poised for Further Gains
From a technical perspective, the recent rebound in USD/JPY suggests that the corrective slide from a multi-month high has run its course. Positive oscillators on the daily chart support the outlook for further gains. Bulls will look for sustained strength above the 155.00 level to confirm a bullish continuation. A break above the weekly top around 155.35 would solidify the positive outlook and could propel USD/JPY toward the 155.70 intermediate resistance, followed by the 156.00 psychological level. Further upside could extend towards retesting the multi-month high near 156.75.
On the downside, the 154.40-154.35 region is expected to provide immediate support. A drop below this could bring the pair closer to the 154.00 level, with further support at 153.30-153.25. If the pair falls below these levels, the 200-day Simple Moving Average (SMA) around 151.90-151.85 may act as a critical support zone.
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