USD/JPY Rallies as Fed Forecasts Less Rate-Cuts for 2025

US Dollar Outlook: USD/JPY

USD/JPY rallies to a fresh monthly high (154.64) even as the Federal Reserve implements a 25bp rate-cut at its last meeting for 2024, and the exchange rate may further retrace the decline from the November high (156.75) as it continues to hold above the 50-Day SMA (152.33).

USD/JPY Rallies as Fed Forecasts Less Rate-Cuts for 2025

USD/JPY breaks out of the range bound price action from earlier this week as the update to the Fed’s Summary of Economic Projections (SEP) shows that ‘the median participant projects that the appropriate level of the federal funds rate will be 3.9% at the end of next year’ instead of the 3.4% forecast at the September meeting.

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Forecasts for less rate-cuts from the Federal Open Market Committee (FOMC) may keep USD/JPY as Chairman Jerome Powell acknowledges that ‘our policy stance is now significantly less restrictive,’ and the central bank may continue to adjust its forward guidance in the months ahead as the FOMC can ‘be more cautious as we consider further adjustments to our policy rate.’

US Economic Calendar

In turn, the update to the US Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred gauge for inflation, may also sway foreign exchange markets as both the headline and core rate are projected to increase in November.

With that said, signs of persistent price growth may generate a bullish reaction in the Greenback as it puts pressure on the FOMC to further combat inflation, but a lower-than-expected PCE print may curb the recent advance in USD/JPY as it encourages the Fed to deliver more than two rate-cuts in 2025.

USD/JPY Price Chart – Daily

Chart Prepared by David Song, Strategist; USD/JPY on TradingView

USD/JPY extends the advance from the weekly low (153.16) to trade back above 153.80 (23.6% Fibonacci retracement), and the exchange rate may track the positive slope in the 50-Day SMA (152.33) as it holds above the moving average.
A breach above 156.50 (78.6% Fibonacci extension) may lead to a test of the November high (156.75), with the next area of interest coming in around 160.40 (1990 high).
At the same time, lack of momentum to test the November high (156.75) may keep USD/JPY within a defined range, with a move/close below 151.95 (2022 high) bringing the 148.70 (38.2% Fibonacci retracement) to 150.30 (61.8% Fibonacci extension) zone back on the radar.

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--- Written by David Song, Senior Strategist

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