USD/JPY Outlook: Bulls Hold the Line as Fed, Core PCE Loom Large

• USD/JPY rebounds after a hawkish BoJ rate hike fails to sustain yen strength
• Fed rate expectations return to the spotlight with Powell’s presser in focus
• Core PCE deflator and US GDP data to test the bullish US economic narrative
• Treasury yield downside risks could weigh on USD/JPY this week
• Key technical levels: 50DMA support, 156.50 resistance

Summary

USD/JPY bulls may have successfully fended off a downside attack sparked by the Bank of Japan’s hawkish hike on Friday, but the battle for near-term directional supremacy is far from over. With substantial bullishness baked into the US economic outlook—and interest rate expectations adjusted accordingly—the risk of disappointment looms large. This is particularly relevant as Federal Reserve policy expectations return as a key driver of USD/JPY direction, increasing focus on Jerome Powell’s press conference and critical core PCE inflation data in the week ahead.

Fed Focus Returns

Japanese economic events can influence USD/JPY at times, as seen with the yen’s modest strengthening following the Bank of Japan’s rate decision on Friday. However, those gains proved short-lived, with the yen gradually unwinding its advance through the remainder of the session.

This reaction isn’t surprising as the US monetary policy outlook remains the primary driver of USD/JPY, especially movements in the front end of the US interest rate curve which are heavily influenced by speculation on Federal Reserve actions.

Source: TradingView

The chart above underscores this point: USD/JPY has maintained the strongest relationship with 2025 Fed rate cut pricing over the past two weeks on a daily timeframe. Yield spreads between US and Japanese 2-year bonds have been marginally less influential over the same period.

Until this correlation shifts, traders should focus primarily on the US rate outlook, even as Japanese factors occasionally generate volatility.

FOMC Meeting, PCE Inflation Headline Event Risk

The week ahead features a busy economic calendar, though only a few events have the potential to significantly move USD/JPY.

The main event is undoubtedly the Federal Reserve’s January interest rate decision. While markets attach almost no probability of a change to the 4.25–4.50% funds rate, the policy statement and Jerome Powell’s press conference could still shift sentiment.

However, the likelihood of a significant hawkish or dovish surprise appears low. If there is a bias, it may lean dovish, as traders have already pared back rate cut expectations for 2025.

Source: Refinitiv (US Eastern Time, Yellow shading important events, Red shading potential market mover)

Powell has recently shown a tendency to align his messaging with market sentiment, and with a strong preference for lower rates among most market participants (and Donald Trump), Treasury yields could face modest downside risks this week. Such a scenario would likely weigh on USD/JPY, given its relationship with US rates.

Outside Powell’s remarks, Michelle Bowman’s post-FOMC speech warrants attention. As the lone dissenting vote against the Fed’s initial 50bp rate cut in September, Bowman is viewed as a prominent hawk. Any deviation from her usual stance could carry outsized influence.

For economic data, the spotlight falls on the advanced Q4 US GDP report and December’s core PCE deflator—the Fed’s preferred inflation gauge. While the GDP report relies on estimates due to incomplete data, it often generates market volatility with a particular focus on consumption and inflation measures.

Source: Refinitiv

The core PCE deflator hasn’t delivered a major surprise recently, thanks to accurate private sector forecasting based on earlier CPI and PPI data. However, combined with readings on household savings, income, and expenditure, it remains the key event of the week.

Also noteworthy are the US Employment Cost Index (ECI), a closely watched wage indicator, and Tokyo inflation data, an advanced gauge of Japanese consumer prices released three weeks ahead of the national figure. Both are due Friday.

Short-dated US Treasury yields have been particularly impactful on USD/JPY movements, making this week’s auctions for 2, 5, and 7-year debt worth monitoring. This guide provides insight on how to interpret the results.

Source: Refintiv

USD/JPY Risks Shifting Lower?

USD/JPY was rangebound for much of last week, attracting bids at the 50-day moving average with offers emerging on pushes above 156.50. While a major support zone exists between the 50 and 200-day moving averages, helping to repel major downside moves so far, signals from momentum indicators and rom bond futures suggest directional risks for Treasury yields and USD/JPY may be starting to skew lower.

As such, the near-term bias is to sell rips and bearish breaks.

Source: TradingView

If the 200-day moving average were to be broken convincingly, it would swing the price and momentum picture firmly bearish, opening the door for a potential push below 150. 148.65 and 147.20 are two downside levels of note.

On the topside, offers above 156.60 capped advances last week, putting it squarely on the radar. If they were to be rolled by bulls, it would open the way for a possible run towards resistance at 158.88.

-- Written by David Scutt

Follow David on Twitter @scutty

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