Central Bank Crossroads: USD/JPY Reacts to Mixed BOJ-Fed Signals

USD/JPY is attempting to retain the bullish momentum after a busy week of central bank meetings. The pair has gained nearly 2% from last Friday’s lows, driven primarily by renewed US dollar strength. However, the rally is encountering resistance near the 145.50–146.00 zone—a critical hurdle for buyers. A decisive break above this range could unlock further upside and reassert the bullish trend.

USD/JPY daily chart

(Past performance is not a reliable indicator of future results)

Central Bank Divergence

Both the Bank of Japan (BOJ) and the Federal Reserve left interest rates unchanged, as expected, but their tones diverged sharply.

In Japan, the BOJ announced a deceleration in its balance sheet drawdown from next year, signalling a cautious approach to unwinding its long-standing ultra-loose policy. This dovish stance—aimed at supporting market liquidity—was justified by heightened geopolitical tensions in the Middle East and ongoing uncertainty around US trade tariffs. It underlines the BOJ’s long-held view that Japan’s inflation spike is largely driven by external, transitory factors.

That said, fresh inflation data released Friday showed mixed signals. While headline inflation eased slightly to 3.5%, core inflation (excluding fresh food) rose to 3.7%, beating expectations and staying nearly two percentage points above the BOJ’s 2% target. The uptick, amid rising energy prices and potential disruption in the Strait of Hormuz, may challenge the BOJ’s dovish narrative going forward.

Fed’s Steady Stance with Mild Dovish Tilt

Meanwhile, the Federal Reserve’s latest projections and dot plot suggest minimal changes over the past quarter. Policymakers now expect slightly lower growth and modestly higher inflation for next year—a profile that hints at mild stagflation risks. The median projection still reflects two rate cuts before year-end.

However, Fed Chair Jerome Powell’s press conference added nuance. He emphasized the need to wait and assess how tariffs might influence consumer prices—signaling a pause in decision-making to avoid premature moves. This helped reassure markets that tariff-related inflation has not yet reached consumers, tempering some of the uncertainty weighing on risk assets in recent months.

The Fed’s combination of caution and limited concern over tariffs was interpreted as constructive for the dollar, reinforcing its recent rebound. Still, the overall tone left room for interpretation, with some investors detecting a slightly dovish tilt, thereby clouding the short-term outlook for USD/JPY.

Furthermore, both the US dollar and Japanese yen retain safe-haven status and are drawing support from rising geopolitical tensions, particularly in the Middle East. This dynamic could continue to inject volatility into USD/JPY in the short term, as capital flows respond to global uncertainty rather than interest rate differentials alone.

USD/JPY remains at a pivotal technical juncture, caught between bullish momentum and macro ambiguity. With key resistance in sight and safe-haven forces in play, traders should closely monitor geopolitical developments and economic data surprises—particularly inflation trends and central bank commentary.