Japanese Yen Forecast: USD/JPY Falls as BoJ and Fed Head in Opposite Directions
USD/JPY continued to fall on expectations that the BoJ could raise interest rates, while the Fed is expected to cut further.
BoJ cautious but leaves open possibility of rate hike
The USD/JPY exchange rate has fallen slightly in the last two sessions as investors believe that the monetary policy divergence between the Bank of Japan (BoJ) and the US Federal Reserve (Fed) will continue to widen. The BoJ has signaled that it may raise interest rates in the near future, while the Fed is preparing for at least two more rate cuts.
The Japanese yen has benefited from expectations of higher interest rates. Some BoJ members expressed concerns about keeping the 0.5% target unchanged at the recent meeting, leading to speculation that the BoJ will take a more hawkish stance. The dollar, on the other hand, has struggled on expectations of more aggressive easing by the Fed as the US economy weakens.
Factors that could curb JPY's rally
While the outlook favors the yen, several factors could limit its strength. Domestic political risks and the impact of new US tariffs could make the BoJ hesitant to raise interest rates. In addition, bullish sentiment in global equity markets has also reduced demand for safe-haven assets like the yen.
However, investors are still waiting for Fed Chairman Jerome Powell's speech, along with global PMI data and Tokyo inflation index, to better determine the next direction of the USD/JPY pair.
Geopolitical factors and global impact
Tensions in Ukraine and Russia, as well as escalating conflicts in the Middle East, have kept the JPY as a safe haven currency. In addition, the Liberal Democratic Party (LDP) leadership elections in Japan in early October will also impact expectations for BoJ policy.
Meanwhile, the Fed cut interest rates for the first time since December and is expected to continue cutting. Markets are even betting that short-term US interest rates could fall below 3% by the end of 2026, widening the policy gap with Japan.
Technical Analysis: USD/JPY at Risk of Deep Fall
On the technical chart, the USD/JPY pair is likely to retreat to the support level around 147.20. If this level is broken, the exchange rate may fall to 147.00 and then to the 146.20 area, or even lower to around 145.50 – the bottom since early July.
On the other hand, the nearest resistance is at 148.00 and the 148.35 – 148.40 zone. If it can be overcome, USD/JPY could head towards 149.00, coinciding with the peak set during the month.