USD/JPY. Analysis and Forecast

[Ben Graham]

The Japanese yen continues sideways consolidation ahead of the Fed's rate decision. Growing recognition that the Bank of Japan will maintain its policy of normalization, combined with cautious market sentiment, has been one of the main factors supporting the yen as a safe-haven currency. At the same time, traders remain restrained and avoid taking aggressive positions ahead of key central bank policy events.

The U.S. Federal Reserve is expected to announce its rate decision today, with at least a 25-basis-point cut anticipated amid signs of labor market weakness. This contrasts sharply with the hawkish expectations for the Bank of Japan.

The resignation of Japanese Prime Minister Shigeru Ishiba has added further uncertainty and could be a strong argument for the Bank of Japan to slow the pace of rate hikes. The upcoming Bank of Japan meeting on Thursday remains in focus. The rate is expected to stay unchanged at 0.5%, given domestic challenges and global risks, including the impact of U.S. tariffs. At the same time, market consensus is that the Bank of Japan will still raise rates by the end of the year.

By contrast, the U.S. Federal Reserve is projected to resume its rate-cutting cycle, reducing borrowing costs by 25 basis points. Moreover, markets are pricing in the possibility of two additional cuts this year amid weakening labor market signals. These expectations have been a major driver of the dollar's recent drop to lows last seen in July.On the diplomatic front, U.S. President Donald Trump stepped up calls for a peaceful resolution of the Russia–Ukraine conflict, proposing to President Zelensky the signing of a ceasefire agreement and urging Europe to immediately halt purchases of Russian oil.

Meanwhile, Israel launched its long-planned ground operation in Gaza, advancing deep into a city that has faced weeks of heavy airstrikes. In addition, an emergency summit of Arab and Islamic leaders in Doha on September 9 condemned Israel's actions toward Hamas leadership, keeping geopolitical uncertainty elevated and supporting the yen as a safe-haven asset.

From a technical perspective, the break and close below the round 147.00 level became a new trigger for the bears. Moreover, oscillators on the daily chart have turned negative, indicating that the path of least resistance for the pair is downward. However, a small rebound from the 100-day Simple Moving Average (SMA) around 146.20 calls for some caution. Therefore, it would be prudent to wait for selling to continue below this area and under 146.00 before planning further losses.

On the other hand, a recovery above the nearest level at 146.70 would attract new sellers and remain capped at the round 147.00 level. But subsequent buying beyond that point could lift USD/JPY above 147.55, on the way toward the round 148.00 level.

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