Japanese yen capped by strong dollar, trade tensions pressure the market

The Japanese yen remained capped against the U.S. dollar, with limited upside despite speculation of further rate hikes by the Bank of Japan (BoJ).

Governor Kazuo Ueda reiterated the BoJ’s focus on reaching a sustainable 2% inflation target.

With Japan’s interest rates still relatively low compared to other economies, the yen is likely to stay under pressure.

While market expectations of Federal Reserve rate cuts could help narrow the interest rate gap and offer some support for the yen, concerns around U.S. tariffs on Canada, Mexico and China could favor the dollar.

These factors contributed to a stronger U.S. dollar and could keep the dollar-yen pair above 155.

In the meantime, Japanese yields on long-term bonds continued to climb as traders expect additional interest rate hikes. However, shorter-term yields could remain volatile as traders react to new economic data releases.

Market attention now shifts to Japan’s Services PMI, due on Wednesday, with consensus expecting a rise to 52.7 in January. A stronger-than-expected figure could help boost the yen to a certain extent in particular if trade tensions subside.