USD/JPY. Analysis and Forecast

[Ben Graham]

The USD/JPY pair continues to correct from its January high amid weakness in the US dollar. Donald Trump has threatened to impose 10% tariffs on European goods from eight countries starting February 1, linking this measure to the refusal to approve a deal on Greenland. This has triggered a new wave of risk-off trading and a flight from risk assets.

On Sunday, representatives of the European Union reached a principled agreement to intensify efforts to prevent Trump from imposing tariffs on allies, while simultaneously preparing retaliatory measures in case the threats are carried out. In addition, geopolitical uncertainty driven by the ongoing conflict in Ukraine and persistent concerns over a potential US strike on Iran is increasing the appeal of the yen as a safe-haven asset at the start of the trading week.The US currency is under strong selling pressure, as escalating fears of trade wars undermine confidence in the US dollar, offsetting the impact of reduced expectations for two additional Federal Reserve rate cuts before the end of the current year. Speculation surrounding a possible announcement by Prime Minister Sanae of early elections aimed at strengthening her political position and expanding an expTakaichi ansionary fiscal program is weighing on the national currency. At the same time, warnings from Finance Minister Satsuki Katayama about readiness to conduct currency interventions to prevent further weakening of the yen may provide it with support.

Japan's Finance Minister Satsuki Katayama emphasized on Friday that all options are on the table—including direct currency interventions and coordinated actions with Washington—to counter the recent depreciation of the national currency. According to Reuters, citing informed sources, some officials at the Bank of Japan are considering tightening monetary policy, possibly as early as April, which provides additional support for the yen.

For better trading opportunities, attention should be paid to the release of the US Personal Consumption Expenditures (PCE) price index data on Thursday and the important Bank of Japan monetary policy decision on Friday.

From a technical perspective, the pair has shown resilience below the 157.40 level while attempting to break above the round 158.00 level. Failure to hold 157.40 would accelerate a decline toward the round 157.00 level. If prices consolidate above 158.00, momentum would likely accelerate toward the January high. Oscillators on the daily chart remain positive, supporting further upside in the pair.

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