US ISM Manufacturing and the Fed in Focus

Later on Monday, US economic indicators will fuel speculation about an H1 2026 Fed rate cut and demand for the US dollar.

Economists expect the ISM Manufacturing PMI to increase from 47.9 in December to 48.3 in January. A less marked contraction across the manufacturing sector would ease concerns about a sharp slowdown in US GDP growth, bolstering the US Dollar. However, traders should consider price and employment trends, considering the Fed’s dual mandate.

Softer prices and falling employment would likely overshadow a pickup in sector activity, and raise expectations of an H1 2026 Fed rate cut. A more dovish Fed policy stance would weaken the US dollar and send USD/JPY lower. Importantly, a more dovish Fed would support the bearish short- to medium-term outlook for USD/JPY.

Beyond the economic data, traders should closely monitor Fed speeches for insights into inflation, the economy, and the timeline for rate cuts.

According to the CME FedWatch Tool, the probability of a March Fed rate cut fell from 15.4% on January 23 to 13.4% on January 30, following a larger-than-expected rise in US producer prices. Meanwhile, the chances of a June cut rose from 60.7% to 61.8% last week. The modest increase in bets on a June cut underscored optimism that inflation will cool, enabling the Fed to lower rates.

Importantly, an H1 2026 Fed cut would support expectations of multiple rate cuts in 2026. Multiple Fed rate cuts would coincide with the BoJ’s hawkish policy outlook, signaling narrower US-Japan rate differentials. Narrowing rate differentials, favoring the yen, would weigh on USD/JPY.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should assess technicals and monitor economic data, central bank chatter, and geopolitical headlines.

On the daily chart, USD/JPY trades below its 50-day Exponential Moving Average (EMA), but above the 200-day EMA. The EMA positions signaled a near-term bearish trend reversal, aligning with the negative price outlook for USD/JPY. Notably, positive yen fundamentals have aligned with the near-term technicals.

A break below the 200-day EMA would bring the 150 support level into play. If breached, October’s low of 146.585 would be the next key support level.

Importantly, a sustained fall through the EMAs would reaffirm the bearish trend reversal. These scenarios would reinforce the negative short- to medium-term price outlook.