Recently, the USD/JPY pair has witnessed notable movements, reflecting the complex interplay between monetary policies, economic data, and geopolitical developments.
The pair has stabilized around the 149.00 level as investors eagerly await the release of Japanese inflation data, which came in mixed.
These figures could play a crucial role in determining the pair’s trajectory soon.
In December 2024, the U.S. dollar maintained its strength against major currencies, supported by rising U.S. Treasury yields and expectations of expansionary economic policies under President Trump’s administration.
The U.S. Dollar Index settled at 108.06, marking a 6.6% increase over the past year. In my view, this strength persisted despite market expectations of future rate cuts by the Federal Reserve, highlighting investor confidence in the U.S. economy.
On the other hand, the Japanese yen depreciated by 10% against the dollar in 2024, marking its fourth consecutive annual decline.
This drop, in my opinion, is partly due to the widening gap between monetary policies in the U.S. and Japan.
While the Federal Reserve remained cautious about future rate cuts due to persistent inflation, the Bank of Japan continued its ultra-loose monetary policy, keeping interest rates low.
With the release of the Japanese Consumer Price Index (CPI) data, the focus has shifted to how this might impact the Bank of Japan’s monetary policy outlook. The annual inflation data showed an increase, which could pressure the BoJ to adjust its policy, potentially strengthening the yen and pushing the USD/JPY lower. However, the monthly CPI came in below expectations, supporting the BoJ’s current stance, which may allow the dollar to maintain its strength against the yen. This makes cautious and sideways movements in USD/JPY the dominant trend in the short term.
I believe that geopolitical developments also play a key role in shaping currency movements. With the Trump administration preparing to impose new tariffs, concerns about a slowdown in global economic growth are rising. This could impact risk sentiment and drive investors toward safe-haven assets like the yen. However, the dollar may remain strong if expectations for expansionary economic policies in the U.S. persist.
As a result, the pair remains under potential downward pressure. Holding above the 148.10 level indicates strong support, while a breakout above 149.50 could lead to a new test of the 150.00 level. Conversely, if the pair fails to sustain its bullish momentum, a decline toward 147.50 or even 146.80 could be expected in the near term.
In conclusion, the future trajectory of USD/JPY will largely depend on upcoming economic data and the monetary policy directions of both the Federal Reserve and the Bank of Japan. Additionally, geopolitical and trade policy developments will continue to influence the pair’s movement. Therefore, I recommend that investors closely monitor these factors to make well-informed trading decisions.
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