USD/JPY forecast: Yields weakness persists ahead of FOMC

US bond yields were heading lower, but the US dollar was trading mixed in the first half of Wednesday session, falling against the yen and yuan, and rebounding against most other currencies. The Dollar Index was therefore a little steady, holding above the July low of 96.37 after Tuesday’s drop. The underlying trend remained bearish for the dollar ahead of the FOMC rate decision today, but today’s mixed performance suggests traders were perhaps re-adjusting their positions and taking profit on currency pairs that have over-extended their run. The thinking here is that just in case the Fed turns out to be less dovish than expected. In any case, I expect the dollar weakness to persist, even if we see a small dollar bounce today. As such, my USD/JPY forecast leans towards a breakdown to 145.00 as things stand.

 

All eyes on the Powell and dot plots

 

Markets are braced for a 25bp Fed cut today, and the dollar’s already on the back foot against the yen and has been against other currencies. But beware: if the Dot Plots stick to just 50bp of easing this year – versus the 70bp priced – we could see a quick dollar bounce before the sellers potentially return. The likely rate cut itself is clearly fully priced in; the wording and projections are what matter. Traders want to see hints of a proper cutting cycle. If the Fed suggests future rate decisions will be data-dependant and sound more cautious, then we could see a jump in short-end yields which could trigger a dollar bounce – even if it proves a temporary move. Powell’s presser is another wild card. If he focuses on job risks and brushes off tariff inflation, the easing narrative holds. If he sounds hawkish, brace for a dollar spike.

 

Technical USD/JPY forecast: Key levels to watch

 

The USD/JPY fell yesterday despite a stronger-than-expected US retail sales report. Markets have largely shrugged off the data, with investors fully pricing in a rate cut at today’s FOMC meeting. The pair slipped around 0.6% after breaking below the 147.00 support level, raising the risk of a deeper bearish move.  The market had tested this level several times in recent weeks, bouncing back but failing to generate follow-through to the upside. Resistance has consistently emerged around the 200-day moving average at 149 and more recently near 148. With upside momentum fading, USD/JPY is now vulnerable to a larger breakdown, particularly if the Fed delivers a dovish surprise.

 

 

If the USD/JPY chart holds below 147.00 following the FOMC rate decisions, then the next key level to watch is 146.00, which coincides with a trendline. A break there could open the door to the psychologically significant 145.00 level next. Below that, downside potential extends towards the low-140s.

 

Meanwhile, on the flip side, any rebound will likely face resistance at 147.00 in the near term and if that level is reclaimed then at 148.00 beyond that. In the bigger picture, USD/JPY would need to reclaim the 200-day moving average to shift the outlook back toward bullish territory. Unless that happens the technical USD/JPY forecast is now tilted to the downside following a lengthy consolidation phase.

 

 

 

In summary

 

The Fed’s easing cycle is restarting and even if the market’s a bit too optimistic on the pace of cuts, we could see the greenback extend its losses if Powell doubles down on jobs and downplays inflation. With the USD/JPY showing technical signs of a potential breakdown, this is the pair to watch today. The USD/JPY forecast could turn more bearish with the help of a breakdown below 146.00 support.

 

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R