The Japanese Yen (JPY) surrendered its modest intraday gains against the US Dollar (USD) during Thursday’s trading session, following an earlier uptick during Asian hours. The initial strength in the JPY came as a reaction to a slight dip in Japan’s Producer Price Index (PPI), which suggested waning inflationary pressures.
However, any momentum was quickly capped amid diminished expectations for near-term Bank of Japan (BoJ) rate hikes, leaving the currency exposed to selling pressure. The brokers at Fimatron offer a comprehensive breakdown of this topic in their article.
Cooling Inflation and Domestic Concerns Pressure BoJ Policy Outlook
Japan’s PPI data released Thursday showed a 0.2% month-over-month drop and a 2.9% year-over-year increase, a notable decline from May’s 3.3% annual rise. This moderation indicates receding inflationary pressures, which may disincentivize the BoJ from pursuing additional monetary tightening.
Compounding the pressure is evidence of weakening domestic demand. Data earlier this week showed that nominal wage growth slowed for the third consecutive month, while real wages registered their sharpest decline in 20 months, undermining household purchasing power.
USD/JPY Movement Constrained by Fed Policy Expectations and Trade Jitters
Despite weakness in the Yen, the USD/JPY pair struggled to extend significantly higher, as the US Dollar itself faces downward pressure amid rising expectations for Federal Reserve (Fed) rate cuts. The June FOMC minutes released Wednesday indicated that most policymakers expect one or more rate cuts before year-end.
They further downplayed the inflationary impact of tariff-related price shocks, characterizing them as likely transitory.
This dovish tilt has caused USD bulls to show caution, thereby limiting gains in the USD/JPY pair. At the same time, rising global trade tensions, especially those stoked by the US President’s aggressive tariff announcements have injected a layer of market uncertainty. As a result, safe-haven demand for the JPY continues to surface periodically, even if fundamental support for the currency has waned.
The US President unveiled plans to implement tariffs of 20% to 50% on eight nations starting August 1. He also imposed 50% tariffs on copper and threatened duties as high as 200% on imported pharmaceuticals, stoking investor anxiety. These developments underscore the fragile state of global trade, keeping investors on edge and offering periodic support to the risk-averse Yen.
Domestic Politics Add Another Layer of Uncertainty
In addition to macroeconomic data and global headlines, Japanese political developments have also influenced JPY performance. Recent polling indicates that the ruling Liberal Democratic Party (LDP) and its coalition partner Komeito may struggle to maintain their upper house majority in the July 20 House of Councillors election.
This political risk introduces additional volatility, potentially capping gains in the JPY.
Nevertheless, Japan is actively working to defuse tensions and protect its economic interests. Officials are reportedly attempting to organize high-level talks between chief negotiator Ryosei Akazawa and US Treasury Secretary Scott Bessent at the World Expo on July 19, with an aim to possibly arrange a bilateral discussion between Prime Minister Shigeru Ishiba and Bessent.
Technical Outlook: USD/JPY Eyes Key Levels
From a technical analysis perspective, the USD/JPY pair has bounced off key support near 145.75, which corresponds to the 100-hour Simple Moving Average (SMA). This rebound follows a brief drop below the 23.6% Fibonacci retracement of the recent leg higher from the monthly swing low.
The 145.75-145.45 zone, which includes the 38.2% Fibo retracement, now acts as a critical support band. A sustained break below this region could expose the USD/JPY to further downside, possibly dragging the pair to the psychological 145.00 handle or even the 50% retracement level.
On the upside, immediate resistance lies near the 146.00 threshold, followed by 146.25-146.30. A decisive break above 146.55 could invalidate the current corrective move and open the path to a retest of the 147.00 psychological mark, followed by the 147.60–147.65 zone, and eventually the June swing high at 148.00.
Outlook: Mixed Sentiment Keeps Traders Cautious
As it stands, the USD/JPY remains caught between conflicting forces. On one side, reduced BoJ rate hike bets and domestic economic headwinds are weighing on the Japanese Yen. On the other, safe-haven demand, trade uncertainty, and dovish Fed expectations are acting as offsetting supports.
The next directional cue will likely emerge from the US Weekly Initial Jobless Claims, due later in the North American session, as well as upcoming speeches from Fed officials. Traders will watch closely for forward guidance on the Fed’s monetary policy trajectory, as this will influence USD performance and, by extension, USD/JPY.
