The USD/JPY has lost more than 1.5% of its value over the last six trading sessions, allowing the Japanese yen to regain ground against the prolonged bullish trend favoring the US dollar. This short-term bearish correction is driven by expectations that the Bank of Japan will raise interest rates in its upcoming decision this week.

Central Banks

In order to understand the behavior of the USD/JPY since mid-September 2024, it is important to evaluate the interest rate outlook in both the United States and Japan.

On one hand, the Federal Reserve (Fed) faces new economic uncertainties with the change in administration in the United States. The arrival of Donald Trump has introduced tariff proposals and tax cuts that could increase long-term inflation by strengthening domestic consumption. This scenario could pose a new challenge for the Fed, extending the pause in the current interest rate of 4.5%.

According to the CME Group, there is a 99.5% probability that the interest rate will remain at its current level (4.25% – 4.5%) for the January 29 decision. Following this trajectory, for the next decision on March 19, the probability of keeping rates unchanged has risen to 73.6% in recent days. This reflects a more aggressive stance by the central bank for the first quarter of 2025, primarily due to uncertainty surrounding inflation. It is important to note that these probabilities may change depending on economic conditions.

Interest Rate Probability Chart January – CME Group

Source: CMEGroup

Interest Rate Probability Chart March – CME Group

Source: CMEGroup

The neutral stance in the United States, reinforced by the probabilities mentioned, has fueled a wave of buying in the USD/JPY in recent weeks. This, combined with the lack of clarity in the Bank of Japan’s monetary policies, has consistently weakened the Japanese yen and sustained the bullish trend in USD/JPY.

On the other hand, on January 23, the Bank of Japan’s next official decision is expected to be announced. The latest inflation data published in Japan stands at 2.9% (November), above the 2% target. This has led the market to anticipate an interest rate hike from 0.25% to 0.5%, which has slightly strengthened the yen in the short term (due to higher expected returns on Japanese assets), driving the current bearish correction in USD/JPY.

Source: Data – FXSTREET

The critical factor moving forward will be to determine whether this new hawkish stance by the Bank of Japan will persist, something that could be confirmed by the comments following the rate decision. If the market is already accustomed to high rates in the United States but anticipates greater aggressiveness in Japan, the current bearish pressure could evolve into a more significant movement.

USD/JPY Technical Forecast

Source: StoneX, Tradingview

• Bullish Trend: Currently, the pair maintains the bullish trend established since September 2024. So far, there have been no bearish corrections strong enough to break the trendline support. However, the latest correction in favor of the yen has brought the price very close to this line. If bearish pressure persists, it could jeopardize the long-standing bullish formation.

   

• 157.927: The nearest resistance, corresponding to the most recent high. Oscillations above this level could strengthen bullish momentum and extend the upward trend.

   

• 155.229: Key support where the trendline and the lower band of the Bollinger Bands converge. Oscillations below this level could cast doubt on the bullish trend and pave the way for increased bearish pressure.

   

• 152.796: Final support, corresponding to a neutral zone from October 2024. Oscillations near this level would definitively break the current bullish formation.

Written by Julian Pineda, CFA – Market Analyst

• EUR/USD moves up and down above 1.0440 on Wednesday. 
• Dovish comments from ECB officials limit the Euro’s gains.
• The pair could attract technical sellers if it manages to stabilize above 1.0440.

After rising to the 1.0450 area earlier in the session, EUR/USD lost its bullish momentum and erased its daily gains. Nevertheless, the pair holds comfortably above 1.0400, while the technical shows the bullish bias remains unchanged in the near term.

The improving risk mood made it difficult for the US Dollar (USD) to find demand in the European session and helped EUR/USD hold its ground. Dovish comments from European Central Bank (ECB) officials, however, seem to be limiting the Euro’s upside ahead of next week’s policy meeting.

ECB policymaker José Luis Escrivá said on Wednesday that a 25 basis points (bps) cut next week is a likely scenario. “Incoming information points towards converging to 2% inflation goal,” Escrivá added. Moreover, ECB policymaker Francois Villeroy de Galhau noted that the disinflation process is still on track and said that there could be a decoupling between the ECB and the Federal Reserve on rates.

The US economic calendar will not offer any key data releases on Wednesday. Later in the day, ECB President Christine Lagarde will participate in the dialogue ‘Beyond Crisis: Unlocking Europe’s Potential’ at the World Economic Forum in Davos.

Meanwhile, US stock index futures were last seen rising between 0.3% and 1%. A bullish opening in Wall Street could cause the USD to stay under pressure and allow EUR/USD to regain its traction.

EUR/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the 4-hour chart retreated slightly after touching 70, suggesting that the bullish bias remains intact, with a potential for a technical correction. On the upside, 1.0440 (Fibonacci 61.8% retracement of the latest downtrend, 50-day SMA) aligns as key resistance before 1.0500 (round level, Fibonacci 78.6% retracement) and 1.0545 (static level). 

Looking south, a strong support area seems to have formed at 1.0390-1.0400, where the 200-period Simple Moving Average (SMA) meets the Fibonacci 50% retracement, before 1.0350 (Fibonacci 38.2% retracement) and 1.0320 (100-period SMA).

Risk-on has been a key theme in the markets from around mid-January and that trend continued after Trump’s inauguration, where a delay in tariff announcements fuelled further optimism. While the stock market has been the major beneficiary, we have also seen the likes of the euro, Canadian dollar and Mexican peso all staging a relief rally. The risk on trade has also benefited the pound, but it is far too early to say whether the GBP/USD forecast has turned bullish.

Market Sentiment dominated by Trump’s Tariff Talks

While markets are buoyed by Trump’s restraint in enforcing blanket trade tariffs on imports into the US, caution is palpable. The daily rhetoric from Trump continues to stir the waters, leaving investors on edge. His threats of imposing trade tariffs on China and the EU remain a cloud over potential market gains. The latest warning? A 10% tariff on Chinese imports, which he said is still under consideration. So, while there has been relief that there weren’t any immediate tariffs, celebrations might be cut short.   

UK fiscal woes keeping a lid on GBP/USD forecast

In Britain, December’s budget figures revealed a wider-than-expected deficit, driven by increased debt interest payments. Borrowing rose to £17.8 billion, far exceeding the forecasted £14.1 billion. These figures underscore the uphill battle for Chancellor Rachel Reeves as she navigates mounting fiscal pressures, leaving the pound vulnerable to further volatility. 

US Dollar weakens – for now

Investors have been trimming long USD positions amid the recent strong performance of US Treasuries, putting yields under pressure. and the temporary reprieve from immediate tariff announcements. Yet, the tariff situation remains fraught with complexity. 

The focus has shifted to Canada and Mexico, following Monday’s threat of 25% tariffs. Both currencies have seen a decent bounce since Friday, suggesting markets are still clinging to hopes of delayed measures.

Today’s US calendar is void of any major data. The question now is whether Treasury yields will fall further lower to put more pressure on the dollar’s momentum.

GBP/USD technical analysis

The technical GBP/USD forecast has improved along with all other USD pairs, but it is far too early to say whether rates have hit a bottom.

Source: TradingView.com

Indeed, the series of lower highs and lower lows since the GBP/USD peaked in September remain intact for now. The bearish trend line connecting those lower highs is also in place.

In fact, the GBP/USD was now testing the first important area of resistance starting at around 1.2360, which roughly marks the low from the start of the year. The bearish trend line itself comes in around 1.2450, while arguably the most important resistance is seen in or around the 1.25 handle.

So, there are lots of hurdles that need to give way for the tide to turn decisively bullish. Until that happens, we will have to treat this recovery as a normal retracement inside the larger bear trend.

A couple of short-term support levels to watch include 1.2300, 1.2250 and 1.2200. If we start to see the breakdown of these levels in the coming days, then that could be a sign that the prevailing bearish trend has resumed.

— Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

Created on January 22, 2025

• As you can see, it’s been very noisy during the trading session here on Tuesday as the 155 yen level continues to be supported right along with the 50-day EMA. Ultimately, this is a market that I think you have to look at through the prism of whether or not it is ready to go higher and pay attention to the interest rate differential as well.
• The biggest problem with this pair right now is the fact that the Bank of Japan continues to be the focus of traders, as Friday is its next interest rate decision. While I don’t necessarily think that they are going to close the gap that far between the United States and Japan, the reality is that the Japanese could very well tighten monetary policy a little bit.

On a Move Lower

If the market were to break down below the 50 day EMA, then we could see this market go looking to the 153 yen level. On the other hand, if we can break above the 156.50 yen level, then it opens up a move to the 158 yen level. I suspect that in the next couple of days will probably be a lot more of this chop that we are looking at right now.

Furthermore, we have a lot of questions about the US dollar in general because Trump is on the warpath already talking about tariffs on Mexico and Canada, and while that doesn’t directly affect Japan, it does directly affect the US dollar. So, expect more noise and more chaos, but really, once we get through this week, we should have a little bit more in the way of confirmation. All things being equal, this is a market that isn’t in an uptrend. I do prefer the upside for no other reason than getting paid at the end of every day.

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Created on January 22, 2025

• The pair has been very noisy over the last 24 hours. That is not a huge surprise, considering Donald Trump is in office now, and, of course, he has been tweeting already, talking about tariffs and causing absolute chaos. I think that’s probably what you are going to see for the next four years.
• That’s certainly what we saw during his first administration – he would just throw comments out there and cause chaos for traders. Because of this, you are going to have to adjust the position size for a while, understanding that volatility is a feature, not a bug, of a Trump administration.

There are a lot of opportunities here though, and this might send the Euro a little higher, but I think there are plenty of reasons to think that the upside is somewhat limited. The 50-day EMA causes a bit of a barrier, and if we can break above there, then we have the 1.06 level offering a barrier as well. And in fact, it’s really not until we get above there that I take any rally seriously. I’ll be looking to buy cheap US dollars, in other words, short this market.

Support

There is quite a bit of interest near the 1.03 level, but until there’s reason to believe that Europe is going to get its house in order, I just don’t have any interest in buying this pair. I think a bounce, and then a shorting opportunity is what you’re looking for. And that’s actually been the case for a moment here. So, with the US dollar being so overbought against so many other currencies, I think it makes sense that we see the Euro, the Australian dollar, the British pound all rise a bit before shorting starts again as interest rates in America continue to be stubbornly strong.

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