The USD/JPY currency pair is experiencing a new phase of volatility as it faces a downward trajectory due to a combination of economic factors. A modest downtick in the US Dollar, coupled with a broad risk-off sentiment fueled by renewed tariff threats from US President Donald Trump, has supported the Japanese Yen (JPY). The pair recently hit over a two-month low, reflecting increased demand for the JPY. Rising expectations of an interest rate hike by the Bank of Japan (BoJ) have elevated Japanese Government Bond (JGB) yields to multi-year highs, further bolstering the JPY.
As the USD/JPY pair grapples with resistance near the 150.90-151.00 horizontal support breakpoint, market analysts suggest that any upward movement could present selling opportunities. The risk remains that such upward momentum might quickly dissipate near the 152.65 area. Consequently, spot prices may accelerate their decline towards the 149.60-149.55 region, potentially heading down to the 149.00 mark and even approaching the December 2024 low around the 148.65 region.
The narrowing interest rate differential between the US and Japan has been instrumental in driving capital flows towards the lower-yielding JPY. This shift in monetary dynamics is attracting attention from investors seeking to capitalize on potential gains from Japanese assets. Meanwhile, US economic data and statements from Federal Reserve officials continue to be closely monitored, as they play a critical role in shaping market expectations.
Speculation that the Federal Reserve may cut interest rates more significantly than previously anticipated adds another layer of complexity to the financial landscape. President Trump's tariff threats and ongoing geopolitical tensions are also factors that could limit the upside potential of the USD/JPY pair. These elements underscore a broader flight to safety, evidenced by a recent slide in US Treasury bond yields.
Technical indicators provide additional insight into the current market scenario. Oscillators on the daily chart remain deep in negative territory, yet they are not yet in the oversold zone, indicating that further downward movement is possible. The path of least resistance for the USD/JPY pair seemingly points downwards, driven by market sentiment and economic fundamentals.
A Reuters poll released this Thursday highlights that a majority of economists expect the BoJ to raise interest rates during the third quarter, potentially increasing them to 0.75%. This anticipated hike aligns with ongoing speculation regarding Japan's monetary policy trajectory and serves as a key driver for JPY demand.