Japanese Yen (JPY) Rebounds Amid BoJ Rate Hike Speculations and Trade War Concerns

The Japanese Yen (JPY) recovers slightly from a multi-day low against the US Dollar (USD) this Monday, dragging the USD/JPY pair back below the mid-155.00s during the early European session. The Bank of Japan (BoJ) Summary of Opinions revealed discussions on the possibility of further interest rate hikes. Additionally, a surge in Tokyo's core inflation at its fastest annual pace in nearly a year strengthens expectations for continued policy tightening by the BoJ, lending support to the JPY.

Key Factors Influencing USD/JPY Movement

1. BoJ Policy and Interest Rate Differentials

The narrowing interest rate differentials between Japan and other major economies, including the US, alongside a risk-off market sentiment, contribute to the JPY’s strength. However, concerns over the economic impact of US President Donald Trump's trade tariffs limit JPY’s gains. Despite broad-based USD strength, the USD/JPY pair maintains a positive bias for the second consecutive day ahead of the release of the US ISM Manufacturing PMI.

2. Trade War Developments and Market Reactions

• President Trump signed an executive order imposing 25% tariffs on Canadian and Mexican imports and 10% on Chinese goods starting Tuesday.

• Canada’s Prime Minister Justin Trudeau, Mexico’s President Claudia Sheinbaum, and China’s foreign ministry announced retaliatory measures.

• The USD rallied across the board, nearing a two-year high reached in January, supporting the USD/JPY pair’s upward momentum.

3. BoJ Outlook and Japanese Government Response

• The BoJ’s Summary of Opinions reaffirmed the necessity of rate hikes if economic activity and inflation remain aligned with expectations.

• Japan’s Finance Minister Katsunobu Kato emphasized monitoring the potential impact of US tariffs on the Japanese Yen.

• Economy Minister Ryosei Akazawa reiterated the government’s commitment to reaching the 2% inflation target while addressing rising living costs.

• The US-Japan yield differential is near a multi-week low, which, along with risk aversion, could prevent significant JPY depreciation.

Upcoming US Economic Data to Watch

Investors await critical US macroeconomic releases at the beginning of the new month, starting with today’s ISM Manufacturing PMI. However, the main market focus remains on Friday’s US Nonfarm Payrolls (NFP) report, a crucial determinant of the Federal Reserve’s next policy moves.

Technical Analysis: Key USD/JPY Price Levels

Resistance Levels:

• 156.00: Immediate resistance level.

• 156.25: Last week’s swing high, acting as a pivotal barrier.

• 156.70-156.75: Potential short-covering rally target.

• 157.00 - 157.60: Key horizontal resistance zone.

• 158.00 - 158.90: Multi-month high from January 10.

Support Levels:

• 155.00: Key psychological support level.

• 154.50 - 154.55: Horizontal support zone.

• 154.00: Another significant round-figure support.

• 153.70: January monthly low.

• 153.30 - 153.00: Deeper support levels if a breakdown occurs.

Conclusion

The USD/JPY pair remains influenced by BoJ rate hike expectations, trade war tensions, and US economic indicators. Traders should closely monitor upcoming US macroeconomic releases and geopolitical developments for further directional cues. While bullish momentum persists above the 156.25 resistance, a breakdown below the 155.00 support could signal a bearish trend reversal.