USD/JPY bulls are stepping back as risk sentiment sours ahead of Wednesday's Fed decision and as expectations for further tightening from the Bank of Japan in 2025 increase, but they remain in control for now.
Markets are highly confident Japan's central bank will keep rates steady on Thursday, although a six-day slide in the yen toward 155 has introduced some uncertainty. One-week risk reversals are moving in favor of yen calls to hedge against a surprise rate hike.
Additionally, market expectations for BOJ tightening in Q1 2025 are rising. These expectations were likely bolstered by Japan’s parliament passing a $90 billion supplementary budget for the fiscal year ending March, aimed in part at easing inflation pressures.
The yen could also gain if concerns about potential U.S. tariffs in the New Year diminish. On Monday, President-elect Donald Trump, alongside SoftBank CEO Masayoshi Son, announced SoftBank’s plan to invest $100 billion in the U.S. over the next four years. Trump also picked George Glass, a critic of China, as his ambassador to Japan. These early moves suggest that U.S.-Japan relations under Trump may not be as contentious as anticipated.
Technically, USD/JPY bulls remain in control due to a series of higher lows above a thickening daily cloud. Momentum turns bearish if USD/JPY fails to close above 155 and slides beneath its 200-DMA and cloud top at 152.12/13.
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(Robert Fullem is a Reuters market analyst. The views expressed are his own.)
((robert.fullem@thomsonreuters.com;))
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