USD/JPY outlook: Powell stays dovish, US-China trade tensions simmer

The USD/JPY has bounced slightly off its overnight lows, along with US index futures as risk appetite improved a tad. But with two more rate cuts on the way from the Fed at a time when the BoJ is trying to normalise its policy, and not to mention the US-China trade war simmering in the background, the balance of risks in the near-term remains tilted to the downside for the USD/JPY outlook.

 

Risk appetite improves - for now

 

Risk was back on the menu overnight as US index futures hit new highs on the week, although European markets were mixed. In FX, the US dollar index fell against most major currencies, giving back some ground after its recent strong performance. Markets are being driven by a delicate mix of optimism and caution this week. The dominant theme remains rate-cut expectations from the Fed, which have helped sustain risk appetite even as gold continues to blaze to fresh record highs, now above $4,200. Investors are largely shrugging off renewed US–China trade tensions, taking President Trump’s latest threat over cooking oil imports in their strides. Meanwhile, upbeat US bank earnings have reinforced confidence in the resilience of corporate America, keeping equities supported despite the ongoing US government shutdown. The dollar’s pullback reflects both improved global risk sentiment and dovish comments from Fed Chair Powell, who signalled that rising labour market risks justify another rate cut. Adding to the positive risk appetite this morning was relief in French political concerns, after Prime Minister Sébastien Lecornu promised to delay his controversial pension reform.

 

Dollar eases on Powell’s dovish remarks

 

With the US government shutdown dragging on, economic data has been thin on the ground, leaving the spotlight on Fed Chair Jerome Powell. Speaking yesterday, Powell acknowledged rising downside risks to the US labour market, saying they warranted a September rate cut. He also hinted at another quarter-point reduction later this month, despite the data blackout caused by the shutdown. Powell even floated the idea of a QT rollback. Still, the overall policy message hasn’t shifted much since September. The market is largely continuing to price in two more rate cuts this year. Those expectations won’t move meaningfully until the next inflation and jobs numbers.

 

Powell’s dovish comments were enough to cause the US dollar to surrender a good chunk of its recent gains, with the greenback also undermined by stronger risk sentiment and the unwinding of euro shorts tied to French political jitters.

 

 

 

Trade uncertainty could boost the appeal of yen

 

Trade headlines continue to hum in the background, with Trump threatening to block Chinese cooking oil imports after Beijing’s refusal to buy US soybeans. 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. Trade uncertainty means haven demand for Japanese yen is likely to provide pressure on the USD/JPY outlook and other yen crosses, keeping their upside limited.

 

USD/JPY outlook: Technical analysis and levels to watch

 

 

From a technical standpoint, the USD/JPY chart may have formed at least a temporary top. The pair formed a large bearish engulfing candle on the daily chart after a strong rally. That reversal occurred precisely at trendline resistance between 153.20–154.00, drawn from the July 2024 and January 2025 highs, where price was rejected near 153.20. Despite the bearish signal, more price action is needed to confirm the reversal, given the pair’s recent bullish price action.

 

Immediate resistance stands around 152.25–152.50, while 151.00 is key support now, a level that was already tested overnight and it held. Should rates now go on to break decisively below 151.00 then that could pave the way for a potential drop to 150.00, then the 200-day moving average near 148.00.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R