USD/JPY forecast: Yen continues to slide, paving way for 160 per dollar

Today we’re breaking down the USD/JPY forecast, which continues to point higher, mainly due to the ongoing yen weakness. The yen has been among the weakest of major currencies, ever since risk assets bottomed in April of last year. While some of the yen’s weakness has been driven by the big risk rally, much of it has to do with domestic factors, and specifically about the nation’s growing debt-to-GDP ratio. The US dollar, meanwhile, is also making a comeback in the last few days, and this too is aiding the rally. The dollar recovery has coincided with the rebound in oil prices, owing to the situation in Iran and other geopolitical risk factors concerning Venezuela and Greenland.

 

Japanese yen weakness continues

 

Investors are worried that the government’s plans to sharply expand fiscal policy is not going to lead to sustainable GDP growth - questioning the rationale at a time when the Bank of Japan has also been tightening monetary policy.  In other words, Japan is pressing the accelerator and brake at the same time. That sort of a policy mix is usually not sustainable, and this has been reflected in bond yields climbing steadily while the yen has been weakening across the board. Investors are demanding better fiscal discipline from the government, but so far all they are getting is some lousy verbal warnings. But will they intervene soon?

 

USD/JPY forecast: Could Japan intervene?

 

Based on Japan’s FX intervention playbook from July 2024, Japanese authorities may still prefer to wait for a clear dollar-negative global catalyst before stepping in. Back then, intervention began with spot close to 162.00, so we are still some 300 pips away from that level at the time of this writing.

 

For now, the yen remains vulnerable to further downside, potentially meaning the USD/JPY rising above 160. That level could attract some resistance, with many analysts view it as the government’s informal line in the sand before it potentially intervenes.

 

 

In terms of support, well the area around 157.90 on the dollar yen pair is the key level to watch on the downside, given that this was the last resistance zone prior to the breakout. Slightly above it, we have 158.20 as another interesting level to watch.

 

Dollar barely flinches as core CPI undershoots

 

We kind of had one or two catalysts that could have driven the dollar lower,  but so far there has been little evidence of that.

 

First, it was the Department of Justice's probe into Jerome Powell. But the pushback from several Republican lawmakers have eased concerns about risks to the independence of the Federal Reserve.

 

Second, we had consumer inflation data come in slightly weaker on the core front, today. Core CPI rose by 0.2% month on month in December against expectations for a rise of 0.3% on the month. But the headline measure was in line, and the dollar barely flinched.

 

Looking ahead to the rest of the week

 

Looking ahead, we have US PPI and retail sales landing on Wednesday, followed by jobless claims on Thursday along with several Fed speakers.

 

One other potentially market moving event that investors will need to be watching is the Supreme Court ruling on Trump’s tariffs. A potentially unfavourable ruling could emerge at some point this week and that may lend further support to the dollar.

 

So that’s the latest USD/JPY forecast: price action remains bullish, with traders selling the yen across the board. The key question is whether and when Japan will now intervene.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R