USD/JPY Forecast: Hawkish Fed chair risk collides with soft Japan data

• Trump says Fed chair nominee will be announced Friday morning U.S. time
• Betting markets swing decisively toward Kevin Warsh
• USD firms as Warsh deemed least dovish candidate
• Weak Japan data leaves USD/JPY exposed to a squeeze

Summary

Donald Trump says he will announce his Fed chair nominee on Friday morning U.S. time, with Kevin Warsh leaping into the lead in betting markets. The shift has supported the USD and challenged debasement narratives, leaving USD/JPY exposed to a squeeze as Japanese data softens.

Fed chair race tilts hawkish as Warsh pulls ahead

Donald Trump is expected to announce his Fed chair nominee on Friday morning U.S. time, bringing a long and market-sensitive process to a head. In the past 24 hours, betting markets have swung decisively toward Kevin Warsh, overtaking former frontrunner Rick Rieder, the BlackRock managing director.

Source: Kalshi

The catalyst for the move was reporting from Rachel Bade, a well-connected U.S. political journalist best known for breaking inside-the-White-House stories and leadership decisions ahead of official announcements. Bade reported that Trump met with his two finalists and is leaning toward Warsh, with one source saying he has effectively been given the “wink and the nod.”

That report appears to have crystallised market thinking. Warsh is widely seen as the most hawkish candidate still in contention and, relative to alternatives, one whose appointment may slightly ease concerns around Fed independence. The result has been a clear USD-positive response as traders move from speculation toward pricing confirmation risk.

Kevin Warsh: a known quantity for the Fed

Kevin Warsh isn’t a newcomer to the Fed. He served as a governor from 2006 to 2011, which meant he was right in the room during the global financial crisis. That matters. He’s seen how the Fed operates when things break, how policy decisions get made under pressure, and where the limits of central banking really are.

He’s long been sceptical of ultra-easy policy, large balance sheets and the idea that the Fed can solve every economic problem. That backdrop explains why markets see him as one of the more hawkish options and why his name moving to the top of the list has been taken as USD positive.

USD firms as debasement narrative loses traction

With Rick Rieder now cast as the alternative rather than the favourite for Fed chair, riskier assets that rallied in anticipation of his nomination may come under pressure. Narratives built around USD debasement and a structurally easier Fed also look less credible under a Warsh outcome, raising the risk of a broader repricing.

Given how stretched positioning has become across several markets, this shift in expectations has the potential to do meaningful damage in the near term, particularly if the nomination is confirmed and recent trades are forced to unwind.

USD/JPY Squeeze Risk Rising

USD/JPY is one such candidate for repricing, with recent sharp declines and weak domestic data released earlier today providing the ingredients for a squeeze. January’s Tokyo CPI data undershot across the board, with headline inflation slowing to 1.5% from a year earlier, core CPI easing to 2.0% and the core-core measure slipping to 2.4%, all below expectations. While subsidy-related base effects remain a factor, the breadth of the miss points to softer underlying momentum rather than a simple distortion.

That message was reinforced by December retail sales, which fell 0.9% from a year earlier versus expectations for a modest increase, highlighting weaker domestic demand. Taken together, the data reduces pressure on the Bank of Japan to continue lifting rates in the near term, particularly after this week’s sharp appreciation in the yen, which further dampens imported inflation risks. Against a backdrop where U.S. rate expectations are firming, the setup leaves USD/JPY vulnerable to a near-term squeeze higher.

Source: TradingView

Given the scale of the downside flush seen earlier this week, USD/JPY looks vulnerable to a decent squeeze, even with intervention risks looming from Japan’s Ministry of Finance.

On the downside, two attempts to break below 152.00 were thwarted earlier this week, with the move stalling at 152.10. That sits just above a support zone running from 152.00 down to 151.00, including important uptrend support dating back to the lows struck during the Liberation Day risk rout in April 2025.

On the topside, 154.45 remains relevant after an attempted push back above the level failed earlier in the week, with Wednesday’s bounce also stalling just below. That screens as a zone for longs to target, with a sustained break opening the door for a run towards 156.00.

While less emphasis should be placed on these signals given the headline-driven environment, RSI (14) and MACD are showing tentative signs of bottoming, even if they still favour short setups over longs. The former is pushing back toward the neutral 50 level after falling into oversold territory, while the latter is starting to curl back toward its signal line while remaining deep in negative territory. The fact the pair is now bouncing after trading below the lower Bollinger Band earlier in the week adds to the sense the bearish tide may be slowly starting to turn.

As has been the case throughout this week, anyone considering USD/JPY setups should keep risk management front of mind given ongoing BOJ intervention risks.