USD/JPY consolidates near four-decade high as traders await Fed and BoJ decisions
Key Takeaways
- •The US dollar fell at the start of the week after the US stopped its strikes and Iran said it would keep the ceasefire while the US remained on pause.
- •The dollar later reversed its losses and reached a weekly high, with the move seen as possibly linked to hedging ahead of the FOMC decision.
- •The Fed is widely expected to keep interest rates unchanged, while traders will watch the statement for any shift in its stance on inflation.
- •The BoJ is expected to hold rates steady on Friday, but its guidance may be scrutinized for signs of concern about the weaker yen and faster tightening.
- •USD/JPY has broken above 162.85, which may now act as support, while sellers are watching for a move back toward 160.50.
Fundamental overview
USD
The US dollar opened the week lower on Monday after the US halted its strikes following 13 consecutive days of attacks, while Iran pledged to maintain the ceasefire as long as the US remained on pause.
The development lifted some market optimism as traders treated it as an early sign of potential de-escalation, triggering a selloff in oil prices.
Despite that improvement in risk sentiment, the greenback erased its losses and reached a new weekly high. That support did not come from Treasury yields or economic data, which suggests the move may have been driven by hedging activity ahead of tomorrow’s FOMC decision.
The Fed is expected to leave interest rates unchanged, although there may be one or two dissenters voting for a rate hike at this meeting. Forward guidance is likely to remain limited again under Fed Chair Warsh, but recent comments from policymakers suggest that the pace of monthly inflation increases will determine the potential pace of tightening. For dollar traders, that keeps the focus squarely on the policy statement and any signs that the committee is becoming more willing to lean against persistent inflation pressures rather than on the decision itself.
If the situation in the Middle East stays calm and the Fed meets expectations without a hawkish surprise, markets could see a short-term relief rally that may weigh on the US dollar. On the other hand, another escalation or a hawkish surprise from the Fed would likely support the greenback and extend gains to new highs.
JPY
On the Japanese yen side, the BoJ is expected to keep interest rates steady on Friday while upgrading growth forecasts and potentially its near-term inflation outlook.
The focus will be on forward guidance after a Bloomberg report last week suggested that some BoJ officials see the weaker yen as adding upside inflation risks and would be open to raising interest rates at a faster pace.
Following that report, traders brought forward rate hike expectations, with the market now pricing a 60% chance of a move in October, compared with December before the report. The yen briefly spiked higher but quickly gave back those gains as the broader fundamental picture remained unchanged. That leaves the BoJ’s communication important not only for rate expectations, but also for whether policymakers acknowledge exchange-rate pressure more directly in their inflation outlook.
Japanese officials may begin considering stealth interventions to slow the currency’s depreciation, although the trend is unlikely to change without a dovish repricing in Fed rate expectations or a faster pace of BoJ tightening. Traders will focus on BoJ Governor Ueda’s press conference for hints or explicit signals about faster tightening.
USD/JPY technical analysis – daily timeframe
On the daily chart, USD/JPY broke above the 162.85 level and extended gains to new cycle highs before consolidating. The 162.85 area may now act as support.
If the pair pulls back, buyers are likely to step in near that support with risk defined below it in an attempt to push the pair to new highs. Sellers, meanwhile, will want to see price break below support before positioning for a drop toward the 160.50 area next.
USD/JPY technical analysis – 4-hour timeframe
On the 4-hour chart, an upward trendline continues to define the bullish structure. If the pair pulls back into the trendline, buyers may lean on it with risk defined below the line to keep pushing toward new highs.
Sellers will want to see a break below both the trendline and the 162.85 support before building positions for a move toward the 160.50 support next.
USD/JPY technical analysis – 1-hour timeframe
On the 1-hour chart, there is little additional to add, as price action has been mostly rangebound since last week.
From a risk-management perspective, buyers have a better risk-to-reward setup around the trendline, while sellers would gain more conviction for a larger correction if support breaks. The red lines define today’s average daily range.
Upcoming catalysts
Today, the US Consumer Confidence report and the Trump-Netanyahu meeting are due. Tomorrow brings the FOMC rate decision.
On Thursday, investors will get the US PCE price index, advance Q2 GDP, and weekly jobless claims. On Friday, the week concludes with Tokyo CPI, the BoJ rate decision, and the US Q2 Employment Cost Index.
Traders will also continue to monitor US-Iran headlines.