USD/JPY forecast: What next for USD vs yen exchange rate?

The USD/JPY exchange rate has retreated in the past few days as the market focuses on the next actions by the Federal Reserve and Bank of Japan (BoJ). It retreated to a low of 152.45 on Thursday, down from this month’s high of 154.82. So, what next for the Japanese yen vs US dollar?

Bank of Japan interest rate hikes

The Japanese yen has gained against the US dollar because of the ongoing divergence between the Federal Reserve and the Bank of Japan. 

The BoJ has embarked on a rate hike cycle to combat the relatively high inflation numbers. Recent data shows that the headline Consumer Price Index (CPI) rose from 2.9% in November to 3.6% in December, the highest level since late 2022. It has risen steadily from last year’s low of 2.5%.

Economists expect Japan’s inflation to remain higher for a while, fueled by government stimulus and wage growth. A recent report showed that Japan’s wage growth rose by 4.8% YoY, as base earnings increased by 2.5% and overtime pay by 1.4%.

Higher wage growth often leads to more inflation because it increases consumer spending or demand. Therefore, with Japan’s inflation higher than that of the United States, the BoJ is likely to maintain its hawkish posture.

It has moved from negative interest rates to 0.5%, and Kazuo Ueda, the BoJ governor, sees the bank having more room to hike. Interest rate hikes help to reduce inflation by making access to capital more difficult.

Federal Reserve to be more hawkish

The USD/JPY exchange rate retreated after the US published strong consumer inflation data on Wednesday.

According to the Bureau of Labor Statistics (BLS), the headline CPI rose from 2.9% to 3.0% in January. Core inflation, excluding volatile food and energy products, rose from 3.2% to 3.3%.

Many sectors of the US economy like insurance and housing are getting more expensive, especially because of the recent wildfires in Los Angeles.

US inflation will worsen this year because of Trump’s policy on tariffs. Trump has announced a 25% tariff on steel and aluminum, which will hit many products like vehicles and construction.

Trump has also announced more tariffs on the most important trading partners like Mexico, Canada, and China. 

His goal is to help reduce the US deficit by making it more expensive for manufacturers to import. He expects that many of them will instead opt to set plants in the US, a strategy that many analysts anticipate to fail.

Therefore, the Federal Reserve will likely hold interest rates steady in the next few months. Some analysts expect it to avoid cutting rates this year, while others expect it to hike rates. In an statement to Invezz, an analyst from ING said:

“The Fed is in a fix, with the US staring at stagflation, a period characterized by high inflation and weak economic growth. Its most likely action will be to hold rates for longer, since cutting will make the inflation scenario worse. Hiking could lead to a slower economic recovery.”

USD/JPY technical analysis

The daily chart shows that the USD to JPY exchange rate has retreated in the past few days. It has moved above the lower side of the rising broadening wedge and is now at the 61.8% Fibonacci Retracement level. 

The pair has moved slightly below the 50-day Exponential Moving Average (EMA) and the Ichimoku kinko hyo indicator. Therefore, the USD/JPY price will likely resume the downward trend because of the BoJ’s hawkish posture and the fact that it has formed a broadening wedge. A breakdown may see it fall to the ultimate S/R pivot point at 150.

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