USD/JPY forecast: Quiet economic calendar increases risk of uptrend retest

USD/JPY reverses sharply, reminding that two-way risks exist
Longer-dated US Treasury yields stall near key levels
Fed rate cut expectations pared back further
Quiet US-Japan calendar keeps focus on price action

Overview

The sharp reversal in USD/JPY last Friday was a timely reminder that two-way risks still exist in this pair. It coincided with similar moves in other markets that had rallied hard post-Donald Trump’s victory in the US presidential election, such as stocks and US bonds.

With a light US calendar and with traders pricing the fewest Federal Reserve rate cuts seen in months, bullish momentum could struggle to extend this week. Add in signs of US Treasury yields topping out, and a retest of uptrend support can’t be ruled out in the coming days.

Fewer Fed rate cuts expected

Market pricing for Federal Reserve rate cuts continues to be scaled back across futures and swaps. A 25bps rate cut in December is now seen as a toss-up, while only three cuts are priced in by the end of 2025.

Simply put, the market has largely baked in economic resilience and the prospect of stronger growth and inflation under Trump’s administration.

Source: TradingView

US rates dictating USD/JPY moves

The re-evaluation of the Fed rate outlook is important to remember when assessing directional risks for USD/JPY given how influential the US interest rate outlook has been on the pair recently.

US five- and 10-year Treasury yields have had the most significant impact on USD/JPY over the past fortnight, with correlation coefficients of 0.94 and 0.93, respectively. In short, they’ve almost entirely moved in lockstep.

While USD/JPY is known for being a popular choice as a funding currency for carry trades, often seeing it rise and fall in line with riskier asset classes such as stocks, right now it’s the US rate outlook that remains the dominant driver.

Source: TradingView

Quiet calendar points to consolidation

From a fundamental perspective, the US calendar offers little to support a move to fresh cyclical highs in interest rates this week. While there are plenty of data releases, none are pivotal to the Fed outlook.

The Japanese calendar is similarly uneventful, barring an unlikely shock in inflation data.

Source: Refinitiv

After Jerome Powell made it clear on Thursday that the pace of Fed rate cuts may slow in the coming months, it’s likely other Fed members will fall in behind the same message in the week ahead.

Source: Refinitiv

Being honest, there are no genuine signal-shifters this week.

Assessing JPY intervention risk

Japan's Finance Minister Kato issued a fresh warning to traders last Friday about the threat of intervention, stating that authorities would take action if the yen weakens excessively. Kato emphasised the importance of stable currency movements that reflect fundamentals, noting recent "one-sided, sharp" moves in the market.

While Japanese officials are closely monitoring the yen, the Bank of Japan is only likely to intervene on behalf of the Ministry of Finance if dollar strength isn’t accompanied by rising US Treasury yields. If yields remain subdued, the case for intervention becomes stronger to curb speculative moves, but if yields climb in tandem, authorities might be more hesitant to step in.

US rates may struggle to push higher

Adding to the sense that it may be difficult for US Treasury yields to push higher this week, the technical picture for US 10-year Treasury note futures continues to point to the presence of dip buyers, as annotated in the chart below.

Source: TradingView

Sure, the price signal provided the week before last proved to be false on directional risks for 10-year Treasury yields last week, seeing them briefly hit multi-month highs, but the dip below 112 was again bought, continuing the pattern seen this year.

Given recent price action and the quiet economic calendar, will traders be willing to probe even deeper lows in the near-term? Maybe, but the risk-reward does not screen as great despite momentum indicators continuing to favour a bearish bias.

USD/JPY: buying dips preferred

Source: TradingView

Despite Friday’s bearish engulfing candle on the USD/JPY daily chart, the bias remains to buy dips near-term with the price remaining in an uptrend, above the 200-day moving average, and with momentum indicators providing no definitive signal.

With a quiet calendar, more weight should be put on price signals this week.

Key levels to watch include:

Support: 153.95, uptrend support around 153, 200-day moving average and 150.90

Resistance: 156.75, 160.23, 161.95

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.