The USD/JPY pair is currently trading around 154.80, continuing its two-week decline as market participants adjust their positions in anticipation of the Federal Reserve’s meeting on December 10 and the Bank of Japan’s policy decision on December 19. The pair has experienced a decline of more than 2.7% in December, marking its steepest monthly drop since July. This movement is attributed to a change in yield dynamics that has narrowed the U.S.–Japan rate differential, thereby diminishing the dollar’s carry advantage. Reports indicates that markets are pricing in an 86% likelihood of a 25-basis-point reduction in the Fed rate, which would adjust the funds rate to a range of 3.50–3.75%. The tone of the policy—particularly the dot plot and Powell’s comments following the meeting—will influence the perception of the move as either a “hawkish cut” or a dovish pivot. At the same time, the Governor of the BoJ, Kazuo Ueda, indicated a possible conclusion to negative interest rates, referencing a year-over-year wage increase of 2.2% in October and a stable core inflation rate of 2.8%, representing the most assertive stance from Tokyo since 2007. Japanese Government Bond yields are on the rise, with the 10-year JGB yield increasing to 0.98%, marking its highest point since Q3 2007, while the 2-year yield has reached 0.35%. This shift has altered the long-standing relationship between U.S. and Japanese rates: the correlation coefficient between USD/JPY and Japanese 10-year yields currently sits at –0.91, suggesting that rising Japanese yields are directly bolstering the yen. Ueda’s hawkish comments have sparked fresh anticipation that the BoJ will unveil its first policy tightening in almost twenty years at the meeting on December 19. Current market pricing through OIS swaps indicates a 68% probability of a 10-basis-point rate hike, which could drive yen appreciation below 150.00, especially if the Fed’s communication supports a dovish outlook for 2026.
The 25 basis point cut is mostly anticipated, but attention has now turned to the Fed’s revised dot plot. The September forecast indicated two additional cuts in 2025 and one in 2026; should Wednesday’s release show fewer cuts on the horizon or a higher long-run neutral rate, it would signify a hawkish adjustment, driving USD/JPY back toward the range of 157.90–158.88. On the other hand, should the outlook for 2026–2027 indicate three or more further cuts, it would reinforce a dovish trajectory and probably drive the pair down to 150.00 or potentially 140.00 in early 2026. Chair Jerome Powell’s press conference holds significant importance, as it could be one of his last appearances before his term ends. Markets are gearing up for a shift in leadership within the FOMC, potentially steering the committee towards a more dovish approach in 2026. The most recent macroeconomic data supports the argument for a reduction in policy measures. The Core PCE Index decreased to 2.8% YoY from 2.9%, indicating movement toward the Fed’s target, whereas the ADP report revealed a decline in job creation to 122,000 compared to 156,000 in the previous month. The JOLTS job openings decreased to 7.20 million, marking the lowest level since 2021, while initial jobless claims increased to 205,000. Meanwhile, Treasury auctions indicated strong demand, with the 10-year yield declining to 4.12%, down from November’s 4.35%, demonstrating investor confidence in a gradual rate-cut trajectory. The current dynamics exert downward pressure on the dollar, contributing to a bearish outlook for USD/JPY, which continues to trade below the 50-day EMA at 155.70.
Revised Q3 GDP indicated a 0.4% quarterly contraction, affirming mild stagnation; however, this is insufficient to disrupt the Bank of Japan’s normalization narrative. Household spending decreased by 3.5% month-over-month; however, wage growth and service inflation mitigated some of the decline. Private consumption, accounting for 55% of Japan’s GDP, continues to show stability, with the Bank of Japan considering wage-led inflation to be sustainable. The producer price index increased by 0.3% month-over-month, reflecting moderate cost-push dynamics. The data points collectively support Ueda’s assertion that Japan is capable of managing modest rate increases without hindering growth. Currently, USD/JPY is in a consolidation phase around 154.80, exhibiting a bearish tendency beneath the 156.40 pivot point. The RSI (14) stands at a neutral position of 48, while the MACD has dipped below its signal line, indicating a decrease in bullish momentum. A clear breach beneath 154.45 would pave the way to 153.00, subsequently targeting the significant 150.00 level. Resistance on the upside is focused around 157.90, which marks the swing high from November, and 158.88, the peak for 2025. A close above these levels would negate the existing bearish structure, though intervention from the Japanese Ministry of Finance may limit any advance past 160.00. The three-candle evening star pattern on the weekly chart continues to prevail, indicating a risk of reversal despite the intraday variations.
CFTC data indicates that non-commercial traders are reducing their long-dollar positions, while JPY net shorts have decreased by 41% in the past two weeks. Hedge funds currently maintain the least net short yen position since August 2023, reflecting expectations of a continued policy divergence between the BoJ and Fed. The correlation between VIX futures and USD/JPY has diminished to –0.32, suggesting a lesser dependence on U.S. volatility as a guiding factor. Institutional accounts in Tokyo and Singapore are shifting their focus from long carry trades in USD/JPY to EUR/JPY and GBP/JPY, anticipating greater yield differentiation in European assets. This adjustment highlights a wider structural shift in yen-based portfolios as the carry trade loses its appeal. The medium-term outlook for the pair indicates a tendency for yen appreciation towards 150.00, influenced by the alignment of rate expectations and a declining dollar. Should the Fed indicate merely two rate cuts in 2026 and the BoJ implements tightening measures, the USD/JPY exchange rate may decline to 140.00 by the middle of 2026. Nonetheless, should U.S. inflation remain persistent and Japanese growth falter, a recovery towards 158.00 could still be anticipated in Q1 2026. Anticipated volatility surrounding these policy events is likely to stay high, with daily ranges expected to surpass 250 pips during the Fed and BoJ press conferences. The USD/JPY is encountering dual pressures from a dovish Federal Reserve and a hawkish Bank of Japan. Technical and macro indicators suggest imminent weakness, with a significant likelihood of a drop below 150.00 if policy divergence expands. The combination of robust yen strength and the potential for U.S. disinflation, along with the possibility of capital flow reversal, creates conditions conducive to a prolonged decline extending into early 2026.