USD/JPY Forecast: Dollar Strength Supports the Pair Amid BoJ and Fed Policy Divergence
Original commentary by FXStreet, reposted via Mitrade
(Original article: https://www.mitrade.com/insights/forex-analysis/jpy/fxstreet-USDJPY-202507251802)
The USD/JPY currency pair continues to find support from the diverging monetary policies adopted by the Bank of Japan (BoJ) and the U.S. Federal Reserve. The dollar’s strength, underpinned by the Fed’s hawkish interest rate stance and robust U.S. economic data, contrasts sharply with the BoJ’s persistently dovish tone. This divergence remains a major driver of the pair’s upward trajectory.
Key Themes Affecting USD/JPY:
1. Divergence Between Fed and BoJ Policy Stances
– The Federal Reserve maintains a relatively hawkish stance in the face of strong U.S. labor market data and enduring inflationary pressures.
– On the other hand, the BoJ continues its ultra-loose monetary policy, showing reluctance to increase interest rates significantly.
– The policy divergence continues to apply upward pressure on the USD/JPY pair as interest rate differentials widen in favor of the dollar.
2. U.S. Economic Performance
– Recent U.S. economic data points to resilience in consumer spending, labor markets, and inflation metrics.
– The Consumer Price Index (CPI) and core CPI have remained elevated, prompting the Fed to maintain its tightening bias.
– U.S. job growth remains firm, with nonfarm payrolls and unemployment reports reflecting a stable labor market.
– This consistent strength in the U.S. economy justifies the Fed’s caution toward loosening monetary policy too soon.
3. Bank of Japan’s Cautious Approach
– Japan’s central bank has not signaled any significant shift in its long-standing policy of monetary easing.
– Governor Kazuo Ueda has reiterated that the Japanese economy requires ongoing support to meet the Bank’s inflation target sustainably.
– Despite mild improvements in inflation and wage growth, the BoJ remains steadfast in preserving current policies, citing fragile domestic demand and global uncertainties.
– Reports indicate that even minor adjustments to its yield curve control (YCC) program are unlikely in the short term.
4. Interventions and Market Concerns
– The Japanese Ministry of Finance (MoF) has previously intervened in the foreign exchange markets to curb excessive yen weakness.
– However, current foreign exchange levels have not yet triggered a similar response, although officials are closely monitoring the situation.
– Market participants are cautious about potential verbal interventions, especially with the yen crossing key psychological levels.
– Any sharp and disorderly depreciation tends to attract attention from Japanese authorities, increasing volatility in the pair.
USD/JPY Technical Analysis Overview:
– The USD/JPY pair recently tested levels near 157.00, a zone that has historically seen profit-taking and some resistance.
– Despite occasional pullbacks, the overall technical structure supports sustained bullish momentum.
– Key support lies near 155.50, which has acted as a strong base for buyers during recent sessions.
– The 20-day and 50-day moving averages remain well-aligned to the upside, signaling a continuation of the pair’s upward trend.
– RSI (Relative Strength Index) hovers near overbought levels, suggesting caution for short-term traders but not yet signaling a significant reversal.
Important Support and Resistance Levels:
– Immediate resistance: 157.00
– Next resistance: 158.00
– Strong support: 155.50
– Key technical support: 154.80
Investor Sentiment and Fund Flows:
– Institutional investors continue to favor the U.S. dollar amid expectations of higher yields and stable growth in the U.S. economy.
– Japanese traders have increased
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