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The USD/JPY has been pinned in a tight band, but with central bank meetings ahead, the yen could finally be forced out of its range.
- Four Fed cuts priced through June 2026; BOJ hikes still in play
- Correlation with U.S. yields has strengthened across the curve
- Risk appetite has had little influence on USD/JPY lately
- Range intact between 147.00 support and 149.00 resistance
USD/JPY Outlook Summary
USD/JPY enters the week rangebound but finely balanced, with central bank risk set to decide the next move. Correlations show the pair is tracking Fed pricing almost exclusively, underscoring how dominant US rate expectations have become while risk sentiment barely registers.
Recent data surprises on both sides of the Pacific have limited the scope for Fed easing while keeping the door open for BOJ hikes, leaving markets priced for cuts in Washington and hikes in Tokyo. With the Fed and BOJ both in play, any deviation from expectations could be the catalyst that finally forces USD/JPY out of its well-worn 147–149 range.
US Rates Grip Strengthens
U.S. interest rates remain the key factor behind USD/JPY movements, especially at the front end of the curve, most influenced by central bank expectations. That’s demonstrated below, looking at the rolling 10-day correlation between the pair and known historic drivers.
Source: TradingView
With market pricing for Fed rate cuts out to June 2026 (red line), the correlation coefficient has strengthened to -0.87, indicating USD/JPY has almost always moved in the opposite direction over the past fortnight. When pricing has increased, USD/JPY has typically fallen, and vice versa. That’s seen on the left-hand side of the chart, with USD/JPY in the top pane and market pricing in the bottom, the latter currently sitting at 109 basis points — a little over four full 25-point cuts.
Unsurprisingly, USD/JPY has also shown an increased positive correlation with U.S. yields further out the curve, with correlation coefficients against 2-year (blue), 10-year (grey) and 30-year yields (purple) all strengthening over the same period, as have 2-year and 10-year yield spreads (green and black, respectively) between the U.S. and Japan.
Reinforcing the dominance of rates on the pair, the correlation with expected U.S. stock market volatility has been negligible over the past fortnight, indicating risk appetite is not a key driver right now.
Fed Meeting Tops Event Risk
With rate decisions from the Federal Reserve and BOJ due later this week, the correlation analysis above suggests that if the narrow range USD/JPY has been trading in since early August is to be broken, it may require a policy surprise. The economic calendar for both the US and Japan is shown below, with U.S. retail sales and Japanese inflation the only major releases of note.
Realistically, unless those reports provide a significant shock, the week will be all about central banks and what they communicate on the outlook for interest rates.
Source: LSEG
Before looking at the Fed and BOJ individually, it’s noteworthy that economic activity in both nations has been holding up recently, as indicated by Citi’s economic surprise indices shown below.
Source: LSEG
The positive readings indicate that a slim majority of data releases have surprised on the upside, limiting the degree of easing markets have priced in for the Fed while keeping the prospect of further rate increases from the BOJ alive. The graphic below shows market pricing for policy rates from the Fed and BOJ, as implied by swaps markets.
Source: Bloomberg
Fed Dots in Focus
In regard to the Fed, a 25-basis point cut taking the funds rate to 4-4.25% is deemed a lock, with a slight chance of a 50 priced in. If the latter were to occur, it would likely spark a large downward move in USD/JPY given its low probability.
Should the Fed deliver a smaller 25-point move, the market reaction will likely come down to what the median FOMC member forecast is for the funds rate this year and next, along with the estimated neutral rate indicated by the long-run forecast. “Neutral” is the estimated level for the funds rate where it neither constrains economic activity nor stimulates it.
Source: Federal Reserve
Three months ago, the median forecast looked for two 25-point moves in 2025 and one in 2026, with the long-run estimate at 3%. On this occasion, the Fed may add two additional cuts to profile, implying the funds rate will sit at 3-3.25% by the end of 2026. That’s roughly what markets have priced in before the updated forecasts are released.
Should the median estimate remain unchanged or lower than three months ago, USD/JPY will likely rally. If the Fed indicates six cuts or more over the next 15 months, the opposite outcome may occur, especially as it would signal a need to push rates into stimulatory territory. That may amplify concerns about the trajectory for the economy, potentially limiting the likelihood of it occurring.
Outside the updated dot plot for the funds rate, commentary regarding the labour market in the policy statement and Jerome Powell in his press conference is likely to be more dovish than the prior FOMC meeting. The vote split may also have an impact, especially given the risk of some members voting for a 50-point move while others vote to leave policy unchanged.
BOJ Signalling to Drive Market Reaction
While there’s plenty to digest from the Fed meeting, the BOJ comes across as a far more tame affair, with markets almost certain the key overnight rate will be left at 0.5%. As this meeting will not contain updated forecasts or an outlook summary, it will be left up to the policy statement and Governor Ueda’s press conference to guide direction.
With uncertainty surrounding bilateral trade with the United States now a little less opaque, the question for traders will be whether the tone is enough to justify market pricing, which looks for nearly two full 25-point hikes by July next year, including around a two-in-three probability of a move before the end of 2025. The BOJ has a reputation for being purposely vague, which may come across as dovish and usually promotes USD/JPY upside. Ueda also tends to lean dovish, so the bigger market reaction may be if he’s not.
Unfortunately, the BOJ still doesn’t provide a set time for policy announcements, although most this year have arrived around 11.30 a.m. JST (9.30 p.m. U.S. ET). Ueda’s presser is scheduled for 3.30 p.m. JST.
USD/JPY Sandwiched in Narrow Range
Source: TradingView
USD/JPY remains rangebound heading into the central bank extravaganza, finding sellers on moves towards the 200DMA/149.00 resistance with buyers lurking beneath 147.00 support. That’s been the play for well over a month, and it’s difficult to see that changing before the policy decisions without some form of market shock. There are no obvious price signals for top directional risks on the daily or weekly timeframes, nor any strong bias on price momentum, with RSI (14) and MACD as flat as a pancake.
Should the prevailing range break, 151.00 and 152.40 are topside levels of note, with 146.00, the April uptrend, 144.40 and 142.42 on the downside.