The USD/JPY pair continued its two-week decline, dropping to 154.50, marking its lowest point since mid-November. This movement reflects the significant volatility in global FX markets, driven by the contrasting monetary policies of the Federal Reserve and the Bank of Japan. The yen appreciated following comments from BoJ Governor Kazuo Ueda, suggesting a potential increase in the benchmark rate to 0.75% during the December 18–19 meeting. Meanwhile, U.S. economic data indicated a significant slowdown in labor and service activity, leading to substantial selling pressure on the dollar. Ueda’s remarks indicated the most definitive direction thus far towards moving away from ultra-loose policy. Japan’s S&P Global Composite PMI increased to 52.0 in November, indicating the eighth consecutive month of growth. Meanwhile, Prime Minister Sanae Takaichi’s stimulus initiative, financed through new debt, has driven 30-year JGB yields to unprecedented levels close to 2.35%. The narrowing yield spread reduced the distance compared to U.S. Treasuries and elevated the yen from its multimonth lows around 158.00. Markets currently reflect a 25-basis-point BoJ rate hike with an over 80% probability, marking the most robust expectation since 2007.
On the U.S. side, a notable weakness was apparent throughout the data stream. The ADP report indicated a reduction in private-sector payrolls by 32,000 jobs in November, marking the most significant decline since early 2023. Additionally, the ISM Services Employment Index decreased to 48.9, suggesting a contraction in the sector. These figures pushed the Dollar Index beneath 99.00, marking its lowest level in more than a year, as investors increased the likelihood of a Fed rate cut in December to 90%. The PCE inflation print, now scheduled for release on Friday, is anticipated to be around 2.7% YoY, aligning with a dovish stance from the Fed. Currently, USD/JPY is positioned slightly above a significant cluster of support levels. The current floor for the pair is established between 154.82 and 155.03, which corresponds to the 78.6% retracement of the 2024 range and the support indicated by the April median pitchfork. This cluster indicates the market’s critical decision point: a sustained break below 154.80 would reveal the 153.65 level, subsequently followed by 151.92 – 151.94, which represent the swing highs from 2022 to 2023. On the other hand, resistance is observed at 156.52, followed by 157.70, with the year-to-date peak around 158.88. Above 159.00, the indicators shift significantly to a bullish stance targeting 161.95, which represents the high close for 2024.
Momentum indicators continue to reflect a bearish sentiment; the RSI is positioned around 38, indicating persistent downside pressure, while the 200-period moving average close to 154.40 serves as a short-term support level. A weekly close below that level would officially conclude the seven-month uptrend that commenced in April. Japan’s yield curve is currently experiencing a rapid steepening as market expectations shift towards policy normalization. The 10-year JGB yield stands at 1.12%, resulting in a narrowed spread against the U.S. 10-year Treasury, which has decreased to 3.94%, marking its tightest level since 2022. This narrowing eliminates a fundamental support for USD/JPY. Furthermore, Japanese authorities have reiterated their warnings regarding foreign exchange intervention, indicating their preparedness to act against “excessive yen weakness.” Market participants assess that the levels for official intervention currently range from 155.00 to 156.50, with verbal support becoming more pronounced as the pair surpasses 156.00. Speculation surrounding the potential replacement of Jerome Powell as Fed Chair by White House economic adviser Kevin Hassett upon the expiration of his term in May has caused unease in the bond markets. Concerns among investors are rising regarding a politically motivated, excessively accommodative shift, which has already exerted downward pressure on U.S. yields and weakened the dollar. In light of the weak jobs data, traders are currently factoring in 125 basis points of cumulative cuts through 2025, resulting in short-term Treasury yields dropping below 4.2%, marking their lowest level since 2023.
From a tactical viewpoint, USD/JPY continues to exhibit weakness beneath 155.70. Any rebound encounters obstacles at the 20-period MA (155.50) and the 156.00 round number. Above that, 156.65 – 157.00 represents the next pivotal zone before bulls can refocus on 158.00. A confirmed break of 154.80 on the downside exposes 153.60, aligning with the swing low from November 14. The daily volume profile for the pair indicates accumulation within the range of 154.20 – 154.60, implying that this zone may serve as a temporary stabilization point prior to the subsequent directional movement. The decision by the Fed on December 10 and the subsequent BoJ meeting the following week are now pivotal in shaping the trajectory ahead. A 25 bps hike by the BoJ, coupled with a cut from the Fed, could initiate the most significant yen rally since 2020, possibly pushing USD/JPY to 150.00 in a matter of weeks. On the other hand, a hawkish surprise from the Fed could push the pair back toward 157.50; however, this scenario seems improbable considering the deteriorating macroeconomic conditions. The overall movement in USD/JPY has transitioned from a phase of consolidation to one of correction. Momentum, yield differentials, and macro signals indicate a favorable outlook for yen strength, as both policy divergence and domestic data present challenges for the dollar. The 155 level continues to be a critical point — trading below it could lead to increased downward pressure; trading above it might only result in temporary stabilization before further selling emerges.