USD/JPY forecast: Hawkish Fed cut could trigger fresh rally

At the time of writing in late afternoon trading in London, the US dollar was broadly lower in anticipation of a third rate cut from the Fed. There was no major data release today and the Bank of Canada’s rate decision came and went without stirring volatility. But all the focus is now turning to the FOMC and Fed Chair Jerome Powell ahead of the upcoming rate decision, likely to be a cut but with a hawkish tilt. Among the currency pairs to watch, the USD/JPY is set to benefit the most from any hawkish surprise you’d feel, given how weak the Japanese yen has been of late. Today, though, the USD/JPY was retreating as US bond yields fell across the curve. With the Bank of Japan also set to meet next week, the USD/JPY forecast will be subject to lots of volatility, especially if the government is forced to intervene, too. All told, it is hard to see how Japan will get out of the mess it has created, which should keep the pressure on the yen even if the BoJ hikes next week.

 

Before discussing the Fed further, let’s have a quick look at the charts and discuss some levels.

 

Technical USD/JPY forecast: Key levels to watch

 

The USD/JPY was retreating back towards 156.00 support level, testing the session lows when this report was written. If the Fed turns out to be less dovish than expected, the pair could climb back to 157.00, and possibly retest the highs of November at 157.90 and then that of January at 158.88 should Powell or his FOMC colleagues turn out to be significantly more hawkish than markets anticipate.

 

 

If the Fed triggers a dollar slide instead, then the next stop for the USD/JPY chart could be at 155.00, which is the next key level of support to watch below 156.00.

 

The bears have a lot of work to do to turn the tide, which appears unlikely ahead of the BoJ meeting next week or without intervention from the Japanese government. So, the dips should remain supported on the dips for the USD/JPY pair.

 

All about the Fed now

 

While rates markets are still pricing around a 10% chance of no move, the Fed will be keen to avoid upsetting expectations. A 25 bps cut looks almost certain, taking the target range down to 3.50–3.75%. But let’s cut to the chase. today’s rate call was never the real headline. The real intrigue lies in the dot plots, the number of dissenters, and what Chair Powell has to say at his press conference.

 

If the dots point to just one or two cuts in 2026, that’s likely to fall short of expectations, with markets currently pricing in 70–80 bps — effectively more than three quarter-point cuts. There’s also a decent risk that the number of dissenters is higher than the lone voice we saw in October. And of course, any surprise tweaks to growth or unemployment projections could easily shift the tone.

 

A lot of attention will naturally gravitate towards Jerome Powell’s press conference at 19:30 GMT. It was this very setting that sparked a sharp dollar rally last time. Should he hint that three straight cuts have taken policy closer to neutral, the greenback could quickly catch a bid again.

 

That said, markets are probably braced for that sort of message anyway, especially after reassessing global central bank policy through a more hawkish lens in recent weeks. The fact that investors are still pricing several cuts for 2026 suggests much of this hinges on expectations that Kevin Hassett — widely viewed as dovish — will soon be guiding Fed policy. As such, Powell’s forward-looking comments may carry diminishing weight for the dollar. Any bounce in the greenback on his remarks is likely to be short-lived against other major currencies. But against the yen, not so much because of the Japanese currency’s own weakness.

 

JPY bulls looking forward to BOJ policy decision

 

That is not until another week and a bit. The Bank of Japan meets on Friday, December 19, which could well be the final important day of the year as the last major central bank decides on monetary policy. There has been much debate about the Bank of Japan’s policy normalisation process and how this might impact borrowing costs for the government looking to unleash fiscal stimulus financed by issuance of more debt. The yen and JGBs have sold off, lifting their yields. A rate hike is now expected, but for the yen much will hinge on forward guidance. Even so, a hawkish BoJ may not necessarily mean the end of the yen slump, as rising yields will continue to raise worries about the nation’s worrying debt levels. It is hard to get out of the mess Japan has created. Investors need to become confident in the nation’s ability to engineer growth to work its way out of debt troubles. That to me is the only way the yen could find some meaningful support. Until that happens, it is difficult to be optimistic on the yen, keeping the USD/JPY forecast largely positive.  

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R