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USD/JPY faces downside risk as Fed rate cuts and BoJ normalization clash.
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Improved risk sentiment supports equities, while gold climbs above $4,200 record highs.
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Trade uncertainty boosts yen appeal, limiting USD/JPY upside amid US-China tensions.
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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 remains tilted to the downside in the near-term 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, 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 stride.
Meanwhile, upbeat US bank earnings have reinforced confidence in the resilience of corporate America, keeping equities supported despite the ongoing US government shutdown. The US 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.
US 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 USD/JPY pair to turn negative as the DXY surrendered a good chunk of its recent gains, with the greenback also undermined by stronger risk sentiment and the unwinding of EUR/USD shorts tied to French political jitters.
Trade Uncertainty Could Boost Yen’s appeal
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 and other yen crosses, keeping their upside limited.
USD/JPY Technical Outlook
From a technical standpoint, the USD/JPY 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.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.