The Japanese Yen (JPY) reversed a sharp decline against the US Dollar (USD) during the Asian session, reaching a one-month high in the final hour. Investors grew cautious after US President Donald Trump’s comments regarding new tariffs reignited fears of a global trade war. Additionally, growing expectations that the Bank of Japan (BoJ) will raise interest rates in its upcoming policy meeting supported the safe-haven JPY.
US Treasury bond yields continued their downward trend, reflecting expectations that the Federal Reserve (Fed) will reduce borrowing costs twice this year. The narrowing US-Japan rate differential further bolstered the Yen. However, a modest recovery in the US Dollar from a two-week low helped limit the USD/JPY pair’s losses as attention remains focused on the critical BoJ meeting later this week.
BoJ Rate Hike Speculation Builds Amid Rising Inflation Pressure
Recent hawkish remarks from Bank of Japan Governor Kazuo Ueda and Deputy Governor Ryozo Himino, coupled with increasing inflation in Japan, have raised the likelihood of an interest rate hike. Markets are pricing in an 80% chance of a BoJ rate increase this week. However, BoJ officials are still awaiting economic data and a review of US economic policies before making a final decision.
Trump’s plans to impose 25% tariffs on Canada and Mexico, starting in early February, have revived inflation concerns, which may prompt the Fed to maintain a hawkish stance and boost the USD. Japan’s Finance Minister, Katsunobu Kato, stated that the BoJ will adjust monetary policy as needed to meet the 2% inflation target, while also closely monitoring the impact of US policies on the global economy.
US economic data, including last week’s Producer Price Index (PPI) and Consumer Price Index (CPI), pointed to easing inflation, leading to speculation that the Fed could cut rates later this year. This kept US Treasury bond yields subdued, putting additional pressure on the Greenback.
Focus Shifts to BoJ Policy Meeting, Technical Levels for USD/JPY
With no major economic data expected from either Japan or the US on Tuesday, market attention is squarely on the BoJ’s two-day policy meeting starting Thursday. The outcome will likely determine the near-term trajectory of the Japanese Yen.
Technically, the USD/JPY pair is holding above the key support level of 155.00, the lower boundary of a multi-month ascending channel. A break below this support could lead to further declines, with initial targets around 154.50-154.45, and then the 154.00 level. On the upside, resistance is seen at 156.25, with a potential rally towards 157.00 if the pair breaks above the 156.58-156.60 zone. A sustained move beyond 158.00 could set the stage for a retest of the multi-month peak near 159.00, last seen on January 10.
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