USD/JPY forecast: Currency Pair of the Week – January 6, 2025

With the US non-farm payrolls to come in a busy week for US economic data, the USD/JPY is our featured currency pair this week. Earlier, the USD/JPY was trading sharply lower, along with all the other dollar crosses, with analysts pointing to reports suggesting that Trump’s aides may be contemplating a more lenient approach to tariffs as the reason for the greenback’s drop. In an interview, Trump had said that “I predict China’s Xi and I will get along, have been talking through representatives.” The key question now was whether Trump will issue any denials regarding this reportedly softer stance. Lo and behold, Trump shortly denied that he will pare back his tariff policy, and up went the dollar. Given his tough rhetoric so far, it’s hard to envision him adopting a more conciliatory tone when he takes office later this month. The dollar is now going to be more headline- driven and potentially boost the appeal of safe haven yen. For now, it may be too early to have a bearish USD/JPY forecast, especially ahead of this week’s key data highlights. But we could see the USD/JPY drift back lower in the days ahead anyway, as the focus turns to data and monetary policy.

Key US data to watch this week

Here’s a list of key US data to watch this week, which could impact the short-term USD/JPY forecast:

If this week’s data, especially the NFP report, fails to meet or exceed expectations then that could cause a bearish shift in the US dollar.

Longer-term USD/JPY Forecast point to a possible correction

The trend may often be your friend, but when it comes to the slightly longer-term USD/JPY forecast, I’m leaning against the prevailing momentum. While the currency pair has enjoyed a bullish streak, I believe the conditions are ripe for a reversal. However, timing is critical—a clear bearish confirmation and pattern are needed before taking action.

In 2024, analysts widely anticipated a stronger performance from the Japanese yen, driven by expectations of the Bank of Japan (BoJ) normalizing its ultra-loose monetary policy. Instead, the BoJ maintained its dovish stance, and the yen continued to weaken, pushing USD/JPY higher for a fourth consecutive year. By late 2024, the pair approached intervention-prone levels between 157.00 and 160.00. The pair was showing signs of struggle around this area again today.

Looking ahead, several factors suggest that the yen could stage a sharp rally in 2025, making a short USD/JPY an appealing trade idea. One factor behind this idea is the potential for the Bank of Japan to tighten its belt. In December 2024, the BoJ held its benchmark rate at 0.25%, disappointing those hoping for a hawkish pivot. Despite this, persistent above-target inflation could compel the central bank to tighten policy in 2025. Japan’s annual inflation climbed to 2.9% in November, driven by rising food and import costs. With inflation likely to remain elevated due to yen depreciation, the BoJ may act to align its policy more closely with global peers. Even a modest rate hike could strengthen the yen and weigh heavily on USD/JPY.

Unwinding of Trump trades

Today’s earlier reports that Trump will scale down tariff plans (which he later denied) means there is always the possibility we could see the unwinding of Trump trades in the coming weeks. After all, much of the dollar’s strength in 2024 stemmed from resilient US data and anticipation of pro-growth policies under Donald Trump. Should these policies falter in 2025, and Trump decides against imposing tough trade tariffs on imports from Eurozone and China, we could see the likes of the euro and yuan recover sharply. This resulting unwinding of “Trump trades” could further pressure USD/JPY lower.

Key Technical Levels to Watch on USD/JPY

Source: TradingView.com

From a technical perspective, the trend is still bullish on the USD/JPY, as evidenced by a rising trend line and key moving averages being below price.

While the pair remains in a bullish trend, a decisive break below the bullish trend line that has been in place since September could signal the start of a deeper correction.

In terms of levels to watch, the 156.75 to 160.00 range serves as a significant resistance zone. Ahead of the abovementioned trend line, there are a few levels to watch, including 156.00 and 155.00, now the most important short-term support levels.

In as far as the longer-term view is concerned, we will need to see a break below December’s low of 148.65 to provide a clearer bearish signal.

Meanwhile, if the USD/JPY refuses to buckle, and instead rises through the 160.00 region then I would imagine it might go on to take out the July high of 161.95 before the bears will have another attempt at driving the pair lower.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R