Japanese Yen fell sharply from a one-month high against a generally rallying US Dollar as trade optimism gained traction following the postponement of tariffs on the European Union. The optimism dissipated safe-haven demand for the Yen, exerting intraday selling pressure. Yet, robust Japanese inflation numbers and increasing prospects of more Bank of Japan interest rate hikes came close to curbing greater Yen losses. Dovish Federal Reserve expectations, as well as unease regarding US fiscal fundamentals, capped the USD’s upward run, leaving the USD/JPY currency pair under close observation. Geopolitical risks and near-term economic data releases provide further uncertainty, implying a careful near-term scenario with scope for ongoing Yen support.

KEY LOOKOUTS

• Forging inflation figures and hawkish speech from BoJ Governor Kazuo Ueda hint at additional interest rate hikes, which could prop up the Yen and prevent its depreciation.

• Expectations of a dovish Fed and worries regarding the US fiscal deficit can cut short the US Dollar’s rally, impacting USD/JPY price action.

• Postponement of tariffs on the European Union has increased risk appetite and slowed down safe-haven demand for the Yen, but continued uncertainty regarding US trade policies is a risk.

• Increased geopolitical risks, including Russia-Middle East conflicts, as well as forthcoming major US economic metrics and Tokyo CPI readings, will be closely watched for their effects on currency dynamics.

Investors need to watch closely what the Bank of Japan does next, as high inflation readings and Governor Ueda’s hawkish lean suggest further rate hikes that would be supportive of the Yen. At the same time, hopes for dovish Federal Reserve actions and worries about the US fiscal deficit might cap the US Dollar’s rebound, capping the USD/JPY pairing in range-trading. Trade developments, including the postponed European Union tariffs, have enhanced risk sentiment and weakened demand for safe-haven assets such as the Yen but still pose risks due to ongoing uncertainty regarding US trade policies. Geopolitical tensions and forthcoming significant economic releases, including US durable goods orders, consumer confidence, and Tokyo CPI, also stand to affect short-term currency volatility.

Look out for additional Bank of Japan rate increases bolstering the Yen in the face of robust inflation readings, as dovish Fed bets cap US Dollar appreciation. Uncertainty regarding trade policy and geopolitical tensions contribute to market hedge, with significant economic reports due to come out likely impacting USD/JPY action.

• The Japanese Yen retreated from a one-month high on enhanced risk appetite following the postponement of US tariffs on the European Union.

•  Firm inflation numbers in Japan and Bank of Japan hawkishness underpin rate hike expectations.

• Dovish Federal Reserve tone and US fiscal worries are capping US Dollar upside.

• Optimism over trade has trimmed safe-haven demand for the Yen, helping to fuel intraday sell pressure.

•  Geopolitical tensions between Russia and the Middle East continue to support some demand for the Yen.

• Technicals indicate that the USD/JPY cross can encounter resistance around 143.00, with probable support at 141.00 and 140.00 levels.

• US economic releases and Tokyo CPI figures due in the coming days will be major catalysts for short-term currency fluctuations.

The Japanese Yen saw a sharp pullback from the one-month high as enhancing trade optimism softened safe-haven appetite. This move followed the US administration’s postponement of imposing tariffs on the European Union, boosting risk sentiment across the world. Nevertheless, uncertainty surrounding US trade policies continues to make investors wary. Japan’s robust inflation reading of a rise in the Services Producer Price Index, coupled with Bank of Japan Governor Kazuo Ueda’s hawkish tone, have supported market sentiment of subsequent interest rate increases, giving the Yen a fundamental support.

USD/JPY DAILY PRICE CHART

CHART SOURCE: TradingView

Conversely, the US Dollar exhibited tentative rebound from recent lows but was constrained by dovish Fed expectations and worries over the US fiscal horizon. Geo-political tensions, such as the Russia and Middle East on-going conflicts, have also maintained demand for such safe-haven currencies as the Yen. Market players are keeping a close eye on forthcoming economic releases in Japan as well as the US, including consumer prices and durable goods orders, that are likely to influence near-term currency action in an environment of cautiously optimistic tone.

TECHNICAL ANALYSIS

The USD/JPY pair recently could not cross above the 61.8% Fibonacci retracement level of its April-May rally, which indicated bearish pressure on the short term. The daily chart oscillators are still in negative ground but are far from becoming oversold, indicating there is still some potential left for further downward movement. Important levels to observe are approximately 142.00, 141.55, and the psychological figure of 140.00, which if violated could pave the way for a more significant drop. On the other hand, resistance is likely around the 143.00 and 143.25 levels, with a sharp move above here likely to provoke short-covering rallies to 144.00 and higher, although advances might be limited around the 145.00 psychological level.

FORECAST

Should the USD/JPY be able to break above the critical resistance levels of 143.00 and 143.25, it may spark short-covering and drive the currency rally towards the 144.00 level. An extended push above this level may see gains extended even further, possibly to the 144.80 to 145.00 levels. Such a rebound may find support from any de-escalation in geopolitical tensions or better-than-anticipated US economic news, which would prop up the US Dollar and take away safe-haven demand for the Yen.

On the contrary, on the negative side, not being able to stay above the 142.00 support level might result in additional selling pressure against the USD/JPY currency pair. Breaking down below the intermediate support around 141.55 might speed declines towards the 141.00 round number, with the psychological 140.00 mark being a focal point. Ongoing hopes for Bank of Japan rate rises and ongoing geopolitical tensions may further support demand for the Yen, cap any real USD strength and push the pair lower in the short term.