The Japanese Yen (JPY) weakened across the board during the Asian session on Wednesday, boosting the USD/JPY pair as it extended its bounce from a one-month low. The positive risk sentiment, driven by a bullish tone in global equity markets, contributed to the JPY’s decline, as investors moved away from safe-haven assets. In addition, a modest recovery in US Treasury bond yields provided further support to the US Dollar (USD), exacerbating pressure on the JPY, which tends to struggle in high-yield environments.
However, any significant JPY depreciation remains unlikely in the short term, as expectations grow that the Bank of Japan (BoJ) will raise interest rates following its upcoming two-day policy meeting starting Thursday. Furthermore, market bets that the Federal Reserve (Fed) will cut interest rates twice later this year may dampen US bond yields and USD strength, urging caution before confirming that USD/JPY has hit a near-term bottom.
BoJ Rate Hike Expectations Drive Optimism for JPY Bulls
The positive sentiment towards the Japanese Yen is partly supported by hawkish statements from BoJ officials and growing optimism about rising wages helping Japan maintain its 2% inflation target. Tomoko Yoshino, the head of Japan’s largest trade union Rengo, has echoed BoJ officials’ views on wage growth momentum. The BoJ has stressed that broad-based wage hikes are necessary to justify an interest rate increase.
Additionally, Japanese Prime Minister Shigeru Ishiba is set to highlight strong wage growth as a key element of his economic revival strategy in an upcoming speech to parliament. The ongoing annual labor negotiations between Japan’s largest business lobby, Keidanren, and trade unions are expected to result in another round of significant wage increases, further strengthening the case for a BoJ rate hike.
The market is now pricing in a more than 90% chance that the BoJ will raise interest rates from 0.25% to 0.5% during its policy meeting on January 23-24, the highest level since the global financial crisis of 2008.
US Tariff Concerns and Inflation Data Add Uncertainty to the USD
Meanwhile, US President Donald Trump’s suggestion of imposing 25% tariffs on imports from Canada and Mexico in early February, alongside the possibility of universal tariffs, adds uncertainty to the global economic outlook. While tariffs are typically seen as inflationary and growth-hindering, Trump has yet to outline specific plans, and any new tariffs would likely be implemented cautiously.
Recent US inflation data, including a weaker-than-expected Producer Price Index (PPI) and Consumer Price Index (CPI), has bolstered expectations that the Fed will cut rates twice later this year, weighing on the USD. A modest recovery in US Treasury bond yields helped the Greenback move away from a two-week low, supporting the USD/JPY pair’s rebound from the 154.75 region.
Technical Outlook: USD/JPY Faces Key Resistance Levels
From a technical perspective, the USD/JPY pair has shown resilience below the 155.00 psychological barrier and the lower boundary of a multi-month ascending channel. Despite some recent upward momentum, the daily chart’s oscillators have not yet gained significant negative traction, suggesting caution for bearish traders.
A sustained break below the trend-channel support could trigger a move towards the 154.50-154.45 area, with further downside potential toward the 154.00 round figure and mid-153.00s. However, the immediate resistance level is seen at 156.00, followed by the overnight swing high around 156.25. A break above these levels could push the pair towards the weekly top at 156.55-156.60, with a potential rally toward 157.00 and beyond.
A sustained move above 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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