The Japanese Yen (JPY) continues to weaken against the US Dollar (USD), hovering near the weekly low as market participants adopt a cautious stance ahead of the upcoming Bank of Japan (BoJ) policy decision. In their latest publication, Servelius experts explore the subject in depth for readers.
During early European session trading on Thursday, the USD/JPY pair reached the 156.00 neighborhood, reflecting pressure on the JPY amid a combination of fiscal concerns and pre-event repositioning trades.
Despite the soft performance, growing expectations of a BoJ interest rate hike and a weaker risk appetite could limit losses for the safe-haven JPY. Market participants are closely monitoring BoJ Governor Kazuo Ueda’s press conference, as his remarks could provide critical insights into the future trajectory of Japanese monetary policy.
Traders Await BoJ Guidance
Ahead of the two-day BoJ meeting, traders have become cautious, refraining from aggressive directional bets on the JPY. The central bank is widely anticipated to raise interest rates to 0.75%, representing a three-decade high. In addition, commentary from the BoJ suggests that further rate increases are possible, though the pace of tightening will depend on economic performance and inflation trends.
This hawkish stance has prompted investors to sell shorter-dated Japanese government bonds (JGBs). Concurrently, concerns about Japan’s fiscal health have emerged following reports on next year’s government spending, pushing the 10-year JGB yield to its highest level since June 2007. The resulting narrowing of yield differentials between Japan and other major economies has acted as a tailwind for the JPY, offering some resistance to the ongoing USD/JPY upside.
USD Recovery Capped by Dovish Fed Expectations
While the USD has preserved its overnight recovery gains, its upside against the JPY remains constrained. Market expectations point to the possibility of two more US Federal Reserve (Fed) rate cuts in 2026, coupled with speculation that a Trump-aligned Fed chair could adopt a dovish stance. These factors create a headwind for the USD/JPY pair, preventing the USD from mounting a strong breakout.
Traders are also awaiting critical US economic data, particularly the consumer inflation figures, which could provide fresh insight into the Fed’s rate-cut trajectory. Any deviation from expectations could spark renewed volatility in the USD/JPY pair, influencing short-term trading strategies.
USD/JPY Technical Outlook
The USD/JPY pair has shown positive momentum following an overnight breakout above the 100-hour Simple Moving Average (SMA). Technical indicators, including hourly and daily oscillators, support the case for a further upward move. However, prudent traders may prefer to wait for a sustained move beyond the weekly high near 156.00 before initiating new bullish positions.
If momentum continues, the pair could target the monthly high near 157.00, with an intermediate resistance zone around 156.55–156.60 acting as a potential hurdle. Conversely, on the downside, the 100-hour SMA around 155.30 may offer support, while the psychological 155.00 mark represents the next significant barrier.
A decisive break below 155.00 could trigger technical selling, exposing the 154.35–154.30 region, or the monthly swing low recorded on December 5, followed by the 154.00 level, which may act as a catalyst for further JPY depreciation.
BoJ Rate Hike: Key Catalyst for JPY
The upcoming BoJ policy decision remains the primary market catalyst for the JPY. A rate hike to 0.75% will mark a major shift in Japan’s monetary policy framework, potentially attracting foreign capital inflows into Japanese assets. Traders will scrutinize Governor Ueda’s commentary for clues on the frequency and magnitude of future rate hikes, as this will determine the JPY’s ability to recover against the USD.
At the same time, broader risk sentiment will continue to influence the JPY, given its status as a safe-haven currency. Global risk aversion could provide short-term support to the JPY, while a renewed appetite for risk may exacerbate its pressure against the USD.
Market Positioning Ahead of Key Data
Traders are carefully balancing BoJ expectations, Fed outlook, and overall risk sentiment. Aggressive long or short positions are largely on hold until more concrete signals emerge from the central banks or major macro data releases. The USD/JPY pair is thus expected to trade within its weekly range for now, with 156.00–155.30 forming the key short-term boundaries, keeping volatility relatively contained in the near term.
Conclusion
In summary, the Japanese Yen remains depressed near weekly lows against the USD, supported partially by BoJ rate hike expectations and risk-off flows. Meanwhile, dovish Fed expectations and pre-event caution are constraining USD gains, leaving the USD/JPY pair poised for potential moves once the BoJ’s decision and guidance are fully digested by the market.
