The Japanese Yen (JPY) extended its pullback from a one-week high during the Asian trading session on Friday, as the US Dollar (USD) regained strength across the board. This USD/JPY rally pushed the pair to a fresh daily high near 143.75, although several market forces suggest that the JPY’s downside may be limited going forward. 

In this article, Fimatron breaks down the complexities of the topic with clarity and precision.

Despite the current intraday weakness, the safe-haven appeal of the Yen remains underpinned by increasing geopolitical risks, ongoing trade policy uncertainty, and the divergent monetary policy outlook between the Bank of Japan (BoJ) and the Federal Reserve (Fed). 

This broader macroeconomic backdrop could temper any sustained bullish momentum in the USD/JPY and favor more range-bound price action in the near term.

Policy Divergence Driving Market Sentiment

At the core of the current currency moves is the contrast in monetary policy trajectories between Japan and the United States. The BoJ, according to Bloomberg sources, is expected to keep its benchmark interest rate steady at 0.5% in its upcoming policy meeting. 

Although this initially weighed on the Yen, investors still believe the BoJ is moving, albeit cautiously, toward policy normalization, especially in the face of broadening domestic inflation.

In contrast, market expectations are firming around a more dovish Fed stance. Data released Thursday by the US Bureau of Labor Statistics showed the Producer Price Index (PPI) rose only 0.1% in May, suggesting muted inflation pressures. 

Additionally, US Initial Jobless Claims held steady at 248,000, while Continuing Claims climbed to 1.951 million, the highest level since November 2021. These figures point to a softening labor market, further cementing expectations for a September Fed rate cut.

The resulting divergence in policy paths between the BoJ and the Fed creates a delicate balance for the USD/JPY pair. While rising US yields could theoretically support the greenback, the anticipated rate cuts and a potential shift in BoJ tightening expectations may act as a counterweight, limiting the upside for USD/JPY.

Safe-Haven Demand Offers Support for the Yen

Heightened geopolitical tensions, particularly in the Middle East, have amplified global risk aversion. Israel launched air strikes against Iran, targeting strategic nuclear and military sites. The move prompted warnings of imminent retaliation, with Iran’s Defence Minister threatening to strike US military bases in the region if conflict escalates.

These developments are sparking a global flight to safety, which typically benefits low-yielding, safe-haven assets like the Japanese Yen. Moreover, US Secretary of State Marco Rubio confirmed that the US was not involved in the Israeli strikes, which could complicate the geopolitical calculus and further elevate volatility in global markets.

As global tensions rise, investors are likely to continue seeking shelter in traditional safe-haven assets, lending structural support to the Yen despite its current retreat from recent highs.

Technical View: USD/JPY Testing Resistance, But Momentum Is Weakening

From a technical analysis standpoint, the USD/JPY pair has recovered intraday to test resistance levels near the 143.50–143.75 zone. A further rise could see the pair challenge the 144.00 level, with the next upside targets at 144.50 and 145.00, a key psychological barrier.

However, the pair has repeatedly failed to sustain gains above 145.00 this week, reflecting underlying bearish pressure. If prices fall back below support at 142.65 and 142.35, momentum may shift in favor of the JPY bulls, exposing downside targets at 142.00, 141.65, and even the 140.80–141.00 region.

Oscillators on both hourly and daily charts appear to be turning lower, and without fresh catalysts to boost the greenback, there is a strong argument for USD/JPY consolidation or mild retracement in the coming sessions.

Conclusion: Yen Set for Volatility but Downside May Be Capped

Despite the Japanese Yen’s retracement from a one-week high, the downside appears limited due to a combination of safe-haven demand, trade policy fears, and policy divergence between the BoJ and the Fed. The USD/JPY pair may experience near-term upward pressure, but technical resistance levels and dovish Fed expectations suggest that a sustainable move above 145.00 may be difficult without a fundamental shift.

With risk-off sentiment likely to persist amid rising geopolitical risks, the JPY remains well-positioned as a defensive asset, and any aggressive USD rallies could be viewed as short-covering opportunities rather than a longer-term trend reversal.