US dollar forecast: USD/JPY rebounds ahead of more central bank action next week - Forex Friday

It’s been quite a volatile day for the USD/JPY and yen pairs in general as traders digest the BOJ policy decision. The overall weaker dollar was the key theme in the first half of the day after Trump’s comments on China and tariffs. The EUR/USD hit 1.05 handle and commodity dollars all rallied in a risk on session. However, after the initial post-BOJ rally, the yen hardly found any further support despite an otherwise bearish day for the dollar. The pair managed to turn flat by mid-day in London. But will the yen have a better second half, or will the selling continue heading into a central bank filled next week? The US dollar forecast remains modestly bullish in our view, because of Trump’s inflationary policies. The fact that it has weakened a little in recent days is more of a reflection of the relief rally that some currencies like the euro have enjoyed.

BoJ cuts as expected

While tariff concerns eased, the BoJ delivered the expected rate hike and the fact it raised its inflation forecasts meant that, on balance, the central bank was a little more on the hawkish side. Yet, Ueda’s press conference leaned slightly more towards maintaining flexibility rather than signalling urgency for additional hikes, and that’s what kept the yen undermined for much of the day. But with Japanese bond yields continuing to rise, will we see another twist in the tale?

The only notable event on the US economic calendar is PMI data, which may play a role in shaping sentiment. We will also have existing home sales and revised figures for UoM surveys coming up. But the bigger risks lie ahead, with three central bank rate decisions looming large for next week.

Before looking at the week a head’s key macro events, let’s have a quick look at the charts of the USD/JPY and the Dollar Index (DXY)

Technical USD/JPY forecast

The USD/JPY has held that 155.00 pivotal level again, holding above the bullish trend line. And with the BoJ out of the way now, don’t expect a breakdown of this key support level any time soon. US inflation is likely to remain high and the Fed won’t be cutting rates any time soon. As a result, we could see the USD/JPY rise back above that 156.00-157.75 resistance area soon. If so, that would point to more bullish price action in the week ahead, potentially targeting the 158.00 level next.

Dollar forecast: DXY tests key support

With the EUR/USD rising to test the key 1.05 handle, the US dollar index is correspondingly testing a key support area around the 107.05 to 107.35 area (shaded in blue). This area was previously a significant resistance zone, not least in October 2023. In November of last year, the DXY struggled to break above here, before finally took it out just after the mid-December point before rising to 110.00. In more recent weeks, the calmer tone across financial markets has allowed the DXY to fall back, but whether or not it will drop more will depend on what happens around this support area. I am expecting to see a bounce to initially lift the DXY to 107.74/75 area, and if we break above that level then the 108.00 level could be the next target. Keep an eye on the DXY here.

Week ahead: BoC, FOMC and ECB rate decisions

BOC rate decision

Wednesday, January 29

Despite some positive economic data of late, analysts are predicting with a high percentage probability that the Bank of Canada will cut rates by 25 basis points at this meeting. Clearly, markets expect the central bank to take into account the possibility of tough tariffs on its exports to the US, and the economic headwinds they will bring on Canada.

FOMC rate decision

Wednesday, January 29

Trump has promised, among other things, to bring down inflation and interest rates. But his protectionist policies are seen boosting inflation, which would argue against a rate cut any time soon. At this meeting, it all about how the Fed views the economy and any hints they may provide for future cuts. The rate decision itself is a foregone conclusion: no changes are expected.

ECB policy decision

Thursday, January 30

There appears to be a growing consensus on the necessity of further rate cuts by the European Central Bank. Last week, ECB President Christine Lagarde's remarks indicated that a 25bp rate cut at this meeting is almost certain, with the rate-cutting cycle likely to continue. Other ECB officials have also echoed that sentiment, even if we have seen PMIs stabilise in recent months, albeit remaining quite low still.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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