- USD/JPY forecast sees JPY gaining from safe-haven flows as trade frictions reheat
- China’s firm stance reignites global risk aversion, weighing on risk sentiment
- Fed commentary in focus as US data scarcity gives the dollar temporary support
Trade war: China retaliates
After a brief moment of calm over the weekend, global markets have found themselves back on edge. Hopes that tariff tensions had cooled were dashed overnight as China imposed restrictions on five US entities of Hanwha Ocean – a South Korean shipbuilder – in retaliation for Washington’s investigation into Chinese trade practices. Beijing’s Ministry of Commerce doubled down, vowing to “fight to the end” in what’s looking increasingly like a renewed trade war. In the FX space, this has reignited safe-haven demand, benefitting the Japanese yen and Swiss franc more than the US dollar, while the latter has outperformed everything else. On the other side of the risk spectrum, the China-sensitive Australian and New Zealand dollars have been hit hard. Against this backdrop, the previously bullish USD/JPY forecast has to be put on hold, with traders leaning into JPY’s defensive appeal amid the uncertainty.
Before discussing the macro factors further, let’s quickly look at the USD/JPY chart which is looking quite interesting from a technical analysis point of view.
Technical USD/JPY forecast and key levels to watch
On Friday, the USD/JPY currency pair formed a large bearish engulfing candle on the daily chart, following a strong multi-day rally. Up until that point, it looked as though the USD/JPY had already found a bottom relative to other USD crosses. However, this sudden reversal now hints at a potential top — whether temporary or something more meaningful remains to be seen.
What makes this setup particularly interesting is where the reversal occurred. As shown on the daily chart, price turned lower right at trendline resistance, drawn from the July 2024 and January 2025 highs. This key resistance area sits between roughly 153.20 and 154.00. On Friday, the lower end of that range was tested — and promptly rejected.
Of course, there was a fundamental catalyst behind the move, namely Trump’s renewed trade war rhetoric. Yet from a purely technical perspective, the rejection at that level is notable in itself.
On Monday, the USD/JPY pair pulled back alongside other risk assets. But given today’s renewed risk-off sentiment in the broader markets, there’s a possibility we could see another wave of selling in the pair.
For now, interim resistance lies around 152.25 to 152.50, an area that has already been tested and held. As for support, 151.00 stands out as an important level — it has acted as both support and resistance in the past. A decisive break below 151.00 could open the door towards 150.00 next. Beneath that, there isn’t much notable support until the 200-day moving average, which currently sits around 148.00, near a rising trendline connecting recent lows.
Even if the USD/JPY chart is in the process of forming a top around current levels, there are several key supports below that could provide opportunities for tradable bounces. The best approach now is to take it one level at a time and reassess the trend’s strength as price approaches each support zone.
If, however, stronger evidence of a major top emerges, we could eventually be talking about the low 140s again — but we’ll cross that bridge when we come to it. For the moment, the focus remains on the short-term levels mentioned above.
A fragile truce under pressure
It remains to be seen whether the US and China will come to some sort of an agreement, perhaps an extension of the tariff truce. That scenario looks more likely than a complete breakdown into a full-blown trade war. However, the risks are undeniably rising. China’s latest trade data released Monday revealed robust export diversification – a sign Beijing can afford to flex its muscles in this geopolitical standoff.
But for the USD/JPY pair to trade sharply lower, we will also need to see calm returning to Japanese political jitters. Indeed, the yen looks undervalued and so it could capture a larger share of safe-haven inflows, potentially driving USD/JPY even lower in the coming days.
Market focus shifts to Powell and US data
As US markets reopen after the long weekend, traders are also contending with a lingering government shutdown. Fed Chair Jerome Powell is due to speak later today on the economic outlook and monetary policy. However, without fresh employment data, he’s unlikely to veer from his cautious tone.
So, as outlined in my reports in recent days, I don’t see an extended USD rebound ahead. Once the US data flow resumes, softening employment and growth figures should gradually weigh the dollar again. For now, this week may deliver a choppy range, but the balance of risk – both fundamentally and technically – favours a stronger yen in the always evolving USD/JPY forecast.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
