Given the mixed inflation numbers, USD/JPY is likely to be more sensitive to Bank of Japan monetary policy cues. The BoJ may view last week’s CPI report as favorable for households and the domestic demand outlook. Typically, softer consumer price inflation boosts households’ purchasing power and consumer confidence, fueling private consumption. An upswing in consumption would raise demand-driven inflation and contribute to GDP growth.

Economist Views on Japan’s Private Sector and Inflation

East Asia Econ remarked on last week’s PMI and inflation numbers, stating:

“Manufacturing sentiment is up, and falling headline inflation should further boost the mood of households too. For the BOJ, the critical issue will be whether these improvements in soft data feed into real aggregate demand, in turn supporting its confidence about the trend in underlying inflation.”

Ongoing expectations of a BoJ rate hike continue to support the bearish short- to medium-term outlook for USD/JPY.

US Tariffs, Economic Indicators, and the Fed in Focus

While market bets on a BoJ rate hike linger, Trump’s tariff policies, US economic data, and Fed chatter will influence buying interest in the US dollar.

Later on Monday, factory orders, the Dallas Fed Manufacturing Index, and the Chicago Fed National Activity Index will provide insights into the US economy. Given that the factory order numbers are for December, the Dallas Fed and Chicago Fed data will likely have more influence on the Fed rate path. Softer numbers would raise expectations of a June Fed rate cut, weakening the US dollar.

Beyond the numbers, President Trump’s tariff policies, US-Iran-related headlines, and Fed chatter will also influence USD/JPY trends.

According to the CME FedWatch Tool, the probability of a June cut fell from 68.6% on February 13 to 51.1% on February 23, strengthening the US dollar.

Nevertheless, market expectations of multiple Fed rate cuts and the BoJ’s more hawkish policy outlook remain key to the negative short- to medium-term outlook for USD/JPY.

Technical Outlook: Key Levels to Watch

For USD/JPY price trends, traders should closely assess technical indicators, key economic data, government policies, and central bank rhetoric.

On the daily chart, USD/JPY remains below its 50-day Exponential Moving Average (EMA), but holds above the 200-day EMA. The EMA positions indicate a bearish near-term but bullish longer-term bias. Despite a bullish longer-term bias, favorable yen fundamentals align with the short-term technical. These fundamentals offset the longer-term technical, supporting a bearish medium-term outlook.

A drop below 153 would expose the 200-day EMA. A sustained fall through the 200-day EMA would indicate a bearish trend reversal, exposing the 150 support level. If breached, 145 would be the next key support level.

Importantly, a sustained fall through the EMAs would reaffirm the negative medium- to longer-term price outlook.