USD/JPY drops below 156 as US CPI eases and BOJ rate hike expectations increase

By Daniela Hathorn14:38 (UTC), 16 January 2025

The Japanese yen strengthened for a second consecutive day on Thursday, bolstered by market expectations of a 25-basis-point (bps) rate hike from the Bank of Japan (BOJ) at its upcoming meeting. Hawkish commentary from Governor Kazuo Ueda has solidified the likelihood of another rate increase—the third since the BOJ ended its negative interest rate policy in March of last year. Over that period, rates have risen from -0.1% to 0.25%, with a potential increase to 0.5% next week, marking the highest level since 2008.

Drivers Behind USD/JPY Weakness

1. Japan’s Inflation and Bond Yields

Broadening inflationary pressures in Japan have driven yields on Japanese government bonds to multi-year highs. This contrasts with the US, where treasury yields declined on Wednesday following softer inflation data. The narrowing yield differential between US and Japanese bonds has put significant downward pressure on USD/JPY.

USD/JPY & US/Japan yield differential (US10Y-JP10Y) daily chart

Past performance is not a reliable indicator of future results.

2. US CPI and Fed Rate Expectations

The US dollar has softened this week as cooling inflation has increased market speculation that the Federal Reserve might implement two rate cuts later this year. Despite this, the dollar remains relatively strong, supported by the resilience of the US economy and expectations of inflationary pressures linked to Trump’s tariff proposals. On the other hand, a more hawkish BOJ stance and increased demand for traditional safe-haven assets continue to lend support to the yen.

Technical Outlook for USD/JPY

Traders should note that the yen’s recent strength largely hinges on the anticipated BOJ rate hike and the continued dovish outlook for US monetary policy. While recent BOJ commentary has been hawkish, it lacks clear urgency regarding immediate rate increases. This raises the possibility of a delay, which could quickly erode the yen’s bullish momentum.

Key Levels to Watch:

Support: Any further pullback in USD/JPY is likely to encounter psychological support at the 155 level. A break below this could open the door to further downside toward the 200-day Simple Moving Average (SMA) at 152.74.
Resistance: On the upside, the pair faces significant resistance at 158. This level, which USD/JPY failed to breach despite several attempts over the past month, is likely to re-emerge as a barrier if bullish momentum for the US dollar resumes.

Broader Market Sentiment

The current market drive is heavily dependent on the BOJ delivering a rate hike next week and sustained dovish signals from the Federal Reserve. If the BOJ delays its rate hike, yen bulls may lose traction, allowing USD/JPY to rebound. Conversely, a confirmed hike would likely solidify the yen’s position in the medium term.