The Japanese Yen (JPY) maintains its negative bias heading into the European session on Wednesday, but its downside appears capped by expectations that the Bank of Japan (BoJ) will hike interest rates later this week. This contrasts sharply with market expectations that the Federal Reserve (Fed) will cut rates twice in 2025. These divergent rate outlooks are limiting the USD/JPY pair’s recovery, which had recently tested the 156.00 round figure.
Traders seem hesitant to make aggressive moves ahead of the highly anticipated BoJ policy meeting later this week, set for January 23-24. This meeting is expected to have a major impact on the near-term trajectory of the JPY. In the meantime, a generally positive market sentiment, supported by a risk-on mood in global equity markets, is weakening the JPY’s appeal as a safe-haven asset. This, in turn, is providing support to the USD/JPY pair, especially as no significant economic releases are due for Japan or the US in the immediate future.
Hawkish remarks from BoJ officials and optimism about rising wages in Japan are bolstering expectations of an imminent rate hike. The BoJ has repeatedly stated that sustained, broad-based wage growth is crucial to meeting its 2% inflation target, and the market is pricing in a more than 90% chance of a rate increase from 0.25% to 0.5%. This would mark the highest rate since the global financial crisis in 2008.
Wage growth momentum is also being supported by the head of Japan’s largest trade union, Rengo, and Prime Minister Shigeru Ishiba’s upcoming policy speech, where he will emphasize the importance of wage growth surpassing inflation. Japan’s business lobby, Keidanren, and trade unions are also engaged in annual labor negotiations, further fueling expectations of significant wage hikes.
The US Dollar has been bolstered by a modest rebound in US Treasury bond yields, recovering from a two-week low and helping to support the USD/JPY pair. The market continues to anticipate that the US Federal Reserve will maintain a more dovish stance, particularly with recent signs of abating inflation, as seen in the Producer Price Index (PPI) and Consumer Price Index (CPI) data. Expectations are growing that the Fed may only implement one more rate cut, as inflationary pressures are easing.
In terms of technical analysis, the USD/JPY pair has shown resilience below the 155.00 psychological level, which also aligns with the lower boundary of a multi-month-old ascending channel. For bearish traders, caution is advised as oscillators on the daily chart have not yet shown significant negative momentum. A sustained break and acceptance below the trend-channel support level would be needed to trigger further downside, with the next key supports around 154.50-154.45, followed by 154.00 and the mid-153.00s.
On the upside, immediate resistance is seen at the 156.00 round figure, with the overnight high at 156.25 providing further resistance. A break above this could lead to further gains, with potential targets around 157.00 and 157.25-157.30. A sustained push past these levels could pave the way for a retest of the multi-month peak around 159.00 reached on January 10.
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