Following Wednesday’s dovish Fed meeting, the US dollar extended its slide yesterday, but has steadied during the first half of today’s session as a bounce in bond yields offered the greenback some relief, particularly against the low-yielding Japanese yen. The recent bearish pressure on the dollar has stemmed not just from shifting rate expectations but also from typical end-of-year seasonality. Still, with the Fed insisting it remains data-dependent and with key US releases — the monthly jobs report and CPI — due next week, the dollar is beginning to find its footing again as the bears ease off the throttle. The USD/JPY forecast will also be subject to the direction of any surprises from the Bank of Japan’s policy decision a week from today. With little of note on today’s US data calendar, the FX market looks set to catch its breath, especially if a hint of risk-off mood emerges from equities or cryptocurrencies.
Focus turns to jobs report after a dovish Fed cut
Investors went into Wednesday’s Fed meeting prepared for a hawkish rate cut, but in the end only two officials dissented and the Fed still kept a rate cut in its median projections for 2026. Just as telling was Chair Powell’s clear reluctance to be boxed into any narrative that the Fed had effectively hit pause. Instead, he stuck firmly to the script that policy is now sitting somewhere within the plausible range of neutral, and that the Fed is well-positioned to act as needed.
Crucially, the press conference didn’t morph into the sort of hawkish shocker we saw back in October. As a result, the dollar climbed against all major currencies following the Fed meeting, which turned out to be a better outcome for dollar bears than it might have been.
Now, Powell also flagged that a heavy run of data lies ahead before the Fed’s next meeting in January, while cautioning that some of those numbers may be distorted by the complications caused by the government shutdown.
With not much on the calendar today, all eyes will now turn to the November jobs report due on Tuesday, with a string of major central bank meetings also lined up then to keep investors on their toes.
US non-farm payrolls will be released on Tuesday, at 13:30 GMT. The delayed November payrolls report will be the last major US macro data along with Thursday’s release of CPI to influence the USD/JPY forecast. Much will depend on this with the Fed’s focus firmly on employment, and any positive surprises could easily send the US dollar sharply higher, especially against some of the weaker currencies like the Japanese yen.
BOJ policy decision could influence USD/JPY forecast into year end
This will be the last major scheduled risk event for the markets on Friday, December 19, when the BoJ is expected to hike rates by 25 basis points. There has been much debate about the Bank of Japan’s policy normalisation process and how this might impact borrowing costs for the government looking to unleash fiscal stimulus financed by issuance of more debt. The yen and JGBs have sold off, lifting their yields. But so far this hasn’t translated into a strong yen.
As mentioned, a rate hike is highly likely, but the yen outlook will largely depend on the Bank of Japan’s forward guidance. Even with a more hawkish stance, this may not mark the end of the yen’s weakness, as rising yields continue to fuel concerns over Japan’s substantial debt burden. The country faces significant challenges in addressing these issues, and investor confidence in Japan’s ability to generate sustainable growth is essential for any meaningful yen recovery. Until that confidence emerges, optimism for the yen remains limited, keeping the USD/JPY forecast broadly positive.
USD/JPY technical analysis and trade ideas
The USD/JPY exchange rate has found support for now where it needed to: right at 155.00 level. This was a prior support and resistance zone. At the time of writing, the pair was retreating back towards 156.00 old support level. A potential break above this level would be a bullish scenario and could see the pair climb to 157.00, and possibly beyond in short order. At this stage I would rule out a potential retest of the high of November at 157.90 or that of January at 158.88, although for rates to get there we will probably need to see a strong set of employment figures from the US next week.
The USD/JPY bears meanwhile have a lot of work to do to turn the tide, which appears unlikely ahead of the BoJ meeting next week or without intervention from the Japanese government. Still, don’t rule anything out, and trade from level to level to stay objective.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
