The USD/JPY pair is currently positioned around 156.10, experiencing a decline for the fifth consecutive session as the yen strengthens in response to increasing anticipations of a Federal Reserve rate cut at the upcoming December 11 FOMC meeting. The recent shift signifies the initial prolonged retreat since early October, when the pair ascended to a 2025 high of 158.21. Selling pressure intensified this week as U.S. yields fell below the critical 4.00% level on the 10-year Treasury, eroding the dollar’s yield advantage. Reports currently indicates an 86.9% likelihood of a rate reduction to 3.75%. This development has prompted traders to reverse long-dollar positions, thereby generating fresh momentum for the yen. Recent U.S. macro data has strengthened the perspective that the phase of monetary tightening is coming to a close. Core PPI increased by a mere 0.1%, falling short of the 0.2% expectation, whereas retail sales remained unchanged at 0.2%, significantly under the 0.4% consensus. The data indicates a decline in inflation and a slowdown in consumer activity, which are significant factors that have led markets to anticipate a more accommodative approach from the Federal Reserve. The DXY Index decreased to 99.08, retreating from the 100.22 resistance level observed in November, indicating a general decline in the dollar’s strength.
In light of the Fed’s continued careful messaging, market participants have started to adjust their positions in anticipation of easing, leading to a narrowing of the U.S.-Japan yield differential that had bolstered USD/JPY during the fourth quarter. Focus in Japan is currently directed towards the forthcoming speech by Bank of Japan Governor Kazuo Ueda, which could offer insights into the trajectory of rate normalization. Following the release of Tokyo’s core CPI, which exceeded expectations at 2.8% YoY, speculation intensified regarding a potential 25 basis point rate hike by the BOJ in December, marking its first adjustment since 2007. Current JGB auction yields are elevated, with the 10-year yield remaining above 0.95%, indicating ongoing market pressure for policy adjustment. If Ueda suggests additional tightening measures, we may see a significant increase in yen strength, potentially pushing USD/JPY down to the 153.00–153.30 support range, which serves as a crucial equilibrium level for this quarter.
The forthcoming U.S. calendar is packed with data releases that may heighten volatility. The upcoming Manufacturing and Services PMIs on Monday and Wednesday, along with Challenger layoffs and weekly jobless claims on Thursday, will significantly influence the near-term policy outlook. On Friday, the core PCE deflator, the Fed’s preferred inflation metric, is expected to set the tone for rate expectations leading up to the December meeting. Historically, USD/JPY shows a pronounced reaction to labor and inflation reports, with intraday fluctuations frequently surpassing 1.2% when actual data diverges from expectations. If inflation continues to decrease, traders may drive yields down further, thereby strengthening demand for the yen. The daily chart for USD/JPY indicates a distinct decline in upward momentum. Following several months of nearly uninterrupted increases, the pair ultimately broke through its October uptrend line last Friday, falling below the ascending channel that characterized the Q4 rally.
Momentum oscillators validate the transition: the RSI (14) decreased from 72 to 54, moving out of overbought territory, while the MACD histogram has leveled off near zero, suggesting a diminishing bullish momentum. The current price is examining a robust support zone ranging from 155.73 to 155.00, with further potential downside targets at 153.68 and 153.00. Resistance is limited at 157.90, with the yearly high of 158.21 serving as the technical catalyst for any potential bullish breakout. The yen’s recovery is influenced not only by expectations surrounding U.S. interest rates but also by the alignment of global yields. The yield spread between the U.S. and Japan for 10-year bonds has contracted by almost 35 basis points over the past two weeks, marking its most significant tightening since July. Japanese investors have reduced their Treasury purchases due to uncertainty surrounding the Fed’s guidance for 2025.
Meanwhile, the BOJ’s yield curve control policy continues to evolve, with reports suggesting internal debate about removing its 1.0% ceiling cap. This change, combined with robust inflation data, has caused the yen to respond more sensitively to minor fluctuations in global yield trends, overturning the previous advantage held by the dollar. CFTC data indicates a decline in the dollar’s supremacy. Net speculative longs in USD/JPY futures experienced a decrease of 11,600 contracts, marking their first significant decline since August. Institutional traders are starting to shift their focus towards yen exposure, especially in short-duration trades, as a strategy to mitigate risks associated with potential easing by the Fed. On the other hand, Japanese corporates continue to engage in dollar purchases for fiscal hedging purposes, establishing a support level around 154.50, where there is significant concentration of options open interest. The interplay between macro bearishness and corporate demand elucidates the pair’s volatile price movements observed throughout the past week. As the Fed blackout period commences, macro sentiment is influencing USD/JPY.
Historically, the pair tends to strengthen ahead of FOMC meetings as investors adjust their short-dollar positions; however, this time, the macro tone seems to diverge from past patterns. The prevailing market confidence in upcoming rate cuts has disrupted the usual pre-FOMC rally pattern that has been evident since 2023. The current pricing of the Fed funds futures curve indicates almost 88 basis points of cumulative cuts anticipated by the end of 2026. Any deviation from this expectation could lead to sudden reversals, particularly if December data demonstrates resilience. The USD/JPY is presently fluctuating within the range of 156.00 to 156.30, maintaining a position slightly above its short-term support level. A daily close beneath 155.00 would indicate a more significant correction towards 153.30, where the 50-day moving average is located. On the upside, only a break and hold above 157.90 would reaffirm bullish dominance and reopen the trajectory toward 158.88. Volatility continues to be high, as indicated by the Average True Range rising to 1.45, implying broad trading ranges into early December. Traders need to observe the response in the range of 154.45–155.00, a significant confluence area from previous resistance in October that may now serve as support. The overarching macro narrative surrounding USD/JPY is closely tied to the differing paths of monetary policy.
Japan’s inflation and bond market behavior suggest that the period of ultra-loose policy is coming to an end, while the U.S. approaches its first easing cycle since 2020. This alignment narrows spreads, diminishes the dollar carry advantage, and promotes capital rotation back into yen-denominated assets. Should the Fed affirm its dovish stance in December, USD/JPY may revisit 153.00, its mid-term equilibrium, with a potential overshoot towards 151.80 if momentum intensifies. The structural tone for USD/JPY has transitioned from a strong bullish stance to a more neutral position. Technical deterioration, narrowing yield differentials, and policy convergence between the Fed and BOJ indicate a neutral-to-bearish outlook through December. Market participants might evaluate short positions close to resistance levels, implementing strict stop-loss orders above 158.20, targeting profit areas within the range of 153.30–153.00 as interest rate forecasts become clearer.