USD/JPY Forecast: Can the bull run survive as Fed rate rethink caps long bond yields?

• Fed rate cut bets fade, capping US growth and inflation expectations
• USD/JPY strongly tied to US yields, which are linked to growth and inflation outlook
• PCE inflation, bond auctions, FOMC minutes, Treasury Secretary nomination to steer rate expectations
• Japanese data secondary consideration; US yields remain the dominant driver

Overview

Fed rate cut expectations continued to fade, keeping a lid on longer-term US bond yields which is limiting USD/JPY upside. Key events next week include the PCE report, GDP revision, and FOMC minutes, with income and spending data carrying the potential to surprise. Japanese inflation data will be watched but remains secondary to US yields in driving USD/JPY. Technically, USD/JPY remains in a strong uptrend, but momentum signals warn of growing downside risks.

Fed rate cut pricing evaporating

Market pricing for Fed rate cuts continues to unwind, with expectations for the December FOMC meeting swinging marginally towards a pause. Looking to the end of 2025, less than three cuts are now priced, a big turnaround from the near eight seen just two months ago.

Source: Trading View

With fewer rate cuts priced, it’s flowing through to sentiment on how US economic growth and inflation may fare in the future. The differential between US two and 10-year Treasury yields sits around 3.5bps, the narrowest since early October. Higher short-term rates are helping to keep a lid on longer-term rates, remembering that economic growth and inflation are two of the main components that drive Treasury yields.

Shifting growth, inflation outlook capping USD/JPY

The capping of longer-term US yields is important considering how influential they have been on USD/JPY in recent months. A strong positive relationship continues to exist between USD/JPY and US 10-year yields, with a correlation coefficient score of 0.85 over the past month. That’s weaker than what we’ve seen recently, likely reflecting the impact of rangebound rates markets and proximity to key technical levels which will be covered later.

Source: Trading View

USD/JPY has also been positively correlated with moves in shorter-dated US yields, albeit the relationship has not been strong. Underlining that Japan’s domestic rates outlook should be a distant secondary consideration for traders, the relationship between US-Japanese yields spreads and Japanese bond yields has either been negligible or counterintuitive to moves seen in USD/JPY.

Ample event risk, but it may amount to little

With US yields influencing USD/JPY, traders need to assess what events may impact the US rates outlook next week. We’re not interested in overloading you with noise about releases that will likely have zero impact, so we’ve highlighted those you need to be aware of and those that cannot be ignored.

Yellow are releases that may generate volatility with red those likely to generate movement.

Source: Refinitiv (US Eastern Time)

Within the US consumer confidence report, it will be the labour market figures that will be closely eyed. The second estimate of US GDP could stir markets if it strays far from the initial 2.8% print. A weaker revision would be notable, especially after rates markets have adjusted to reflect ongoing economic resilience.

Wednesday’s PCE report is arguably the week’s main event. While the Fed’s preferred core PCE deflator often aligns with forecasts thanks to refined models, it still matters. Another 0.3% monthly rise is forecast, equivalent to a 3.6% annualised pace. That’s would remain well above the Fed’s 2% target, reinforcing the case for keeping rates steady next month. Don’t overlook the income and spending data within the PCE release. These metrics often deliver surprises and have direct implications for growth, spending, and the labour market.

Though not listed on the calendar, the minutes of November’s FOMC meeting may also hold weight. Focus on the “considerations for policy” section for clues on whether recent chatter about staggered rate cuts was discussed.

Given the strong correlation with yields, Traders also need to be watch for signs of shifting demand in auctions of US two, five and seven-year Treasury notes ahead of Thanksgiving

Source: Refinitiv

In Japan, inflation figures must stay firm to support market expectations of a modest BOJ rate hike within the next two meetings. While this could spark temporary USD/JPY moves, remember the broader US rates outlook remains the key driver.

US markets will be closed on Thursday for Thanksgiving with turnover set to be light on Friday as many traders opt for a long weekend.

Also keep an eye on Donald Trump’s pick for US treasury secretary. Former Fed governor Kevin Warsh, known for his hawkish inflation stance, could trigger a sharp drop in yields, while candidates like Scott Bessent might nudge yields higher.

Futures suggest US yields may be topping

Source: Trading View

The technical picture for US 10-year Treasury note futures provides a useful guide on directional risks for yields and USD/JPY. Likely reflecting the light calendar last week, movements in rate futures have been limited recently.

The price remains in a downtrend, with bullish breakouts constantly thwarted since being established in October. Should the pattern continue, that points to lower prices and higher yields, and likely renewed USD/JPY upside.

However, the price has not come close to testing the lows set on November 15 recently, with the hammer candle that day still indicative of a possible market bottom. RSI (14) and MACD are generating bullish momentum signals, trending higher even as the price has ground lower.

The combination doesn’t guarantee we’ll see a turning point or bullish breakout, but it doesn’t harm the chances either. Despite some big risk events on the calendar, you get the sense that if we don’t see a meaningful surprise from them, the rangy price action may continue throughout the week. Therefore, it may be worth putting more weight on technical signals near-term.

USD/JPY uptrend holds, for now

Source: Trading View

USD/JPY sits in a strong uptrend, the exact opposite picture from US 10-year Treasury futures above. The two are eerily similar with indicators such as RSI (14) and MACD generating bearish signals, indicating waning bullish momentum. That’s a warning sign for longs despite not yet materialising in the price action.

For now, if USD/JPY remains above uptrend support, the bias is to buy dips. But if the uptrend were to be broken, traders may want to revert to selling breaks and pops. The price signal from a bearish break would be enhanced if accompanied by a downtrend break in 10-year Treasury note futures.

Levels to watch include:

Support: 153.38, 200-day moving average, 150.90

Resistance: 156.75, 160.23

-- Written by David Scutt

Follow David on Twitter @scutty