Position and Upside Risk

In my view, bets on more BoJ rate hikes, threats of yen intervention, and expectations of Fed rate cuts suggest a negative price outlook. However, the BoJ neutral interest rate and incoming US economic data will be pivotal, given the focus on US-Japan rate differentials.

A higher neutral interest rate level would signal multiple BoJ rate hikes and a narrower US-Japan interest rate differential. A narrower rate differential would likely trigger a yen carry unwind, sending USD/JPY toward 140 over the longer term.

However, upside risks to the bearish outlook include:

• Dovish BoJ rhetoric and neutral interest rate in the range of 1% and 1.25%.
• Upbeat US economic indicators.
• Hawkish Fed chatter.

These events would send USD/JPY higher. However, the threat of yen interventions is likely to cap the upside at the 158 level, based on the latest communication.

Read the full USD/JPY forecast, including chart setups and trade ideas.

Conclusion: Focus on the BoJ Neutral Rate

In summary, the USD/JPY trends will hinge on the BoJ’s neutral rate and the Fed rate path.

A neutral rate in the range of 1.5% to 2.5% would suggest a more hawkish BoJ rate path. Additionally, dovish Fed chatter would support expectations of narrower rate differentials, reinforcing the bearish outlook for USD/JPY.

Crucially, a sharply stronger yen could kickstart an unwinding of yen carry trades, which would likely push USD/JPY toward 140 over the longer 6-12 month time horizon.

For more in-depth analysis, review today’s USD/JPY trading setups in our latest reports and consult the economic calendar.