Trade Tariffs Drive USD/JPY to New Lows
Over the last month, the USD/JPY price has trended lower, primarily due to changes in US trade policy. Developments on tariffs have caused wild swings that have favored the yen. Other catalysts during the month included shifts in economic and monetary policy in Japan and the US.
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Intra-Month Rebounds Reflect Dollar’s Temporary Recovery
Although USD/JPY trended lower, it had periods when the price rebounded as the dollar recovered.
Trade Tariffs Triggered a Sharp Drop in USD/JPY
The recent drop in the USD/JPY price came after Trump imposed reciprocal tariffs on most of the US’s trading partners. The US president implemented a baseline tariff of 10% on almost all imports, with some countries, such as China, suffering higher levies.
The move was more aggressive than expected, leading to panic selling of US assets. Consequently, the dollar collapsed. At the same time, demand for safe-haven currencies, such as the yen, increased, sending USD/JPY lower. Trump later suspended the tariffs for 90 days, but the damage was done. Investor confidence in the US economy plunged, and risk appetite dropped.
Furthermore, the US presidents started a tariff war with China that ended with a 145% duty on all imports from the country. Meanwhile, China responded with a 125% tariff on US imports. The US-China trade war further dampened risk appetite, boosting the yen. Moreover, it heightened concerns about a likely US recession, which weakened the dollar.
Additionally, Trump started attacking the Fed, calling for Powell to lower interest rates immediately. The comments raised concerns about the central bank’s independence. It was another reason for traders to dump the dollar.
Finally, downbeat US data also pushed USD/JPY lower. An unexpected jump in the unemployment rate and poor inflation figures increased expectations for Fed rate cuts. Meanwhile, in Japan, policymakers remained confident about the prospect of rate hikes despite Trump’s tariffs.
Easing Trade Tensions and Dollar Recovery Support USD/JPY Rebound
The recent rise in USD/JPY came as the dollar recovered from its massive drop. Trade tensions between China and the US eased slightly as both countries expressed a willingness to lower tariffs and start negotiations.
The US said that it was ready to reduce tariffs on China to 50%. Meanwhile, China was prepared to make tariff exemptions on certain US goods. The easing tensions brightened the outlook for both economies, boosting risk appetite. As a result, the yen lost its safe-haven appeal. Meanwhile, the dollar rebounded.
Moreover, the dollar recovered after Trump stopped his attacks on the Fed, easing investor concerns.
Economic Data and Policy Updates from the US
In the last month, there was little focus on economic and policy changes. Nevertheless, they shaped the outlook for future price movements.
In the US, major economic releases included employment, inflation, and retail sales. The nonfarm payrolls report revealed faster-than-expected job growth in March. The economy added 228,000 jobs, exceeding the forecast of 137,000. However, the unemployment rate unexpectedly jumped to 4.2%, revealing cracks in the labor market.
Meanwhile, the Consumer Price Index dropped by 0.1% in March compared to expectations of a 0.1% increase. Meanwhile, the annual figure increased by 2.4%, which was below the estimated 2.5%. The data increased Fed rate cut expectations, hurting the dollar.
Finally, the sales report indicated a 1.4% increase, which was larger than the expected 1.3%. The report revealed robust consumer spending, briefly easing recession worries. As a result, the dollar strengthened.
There were few changes in monetary policy. Powell maintained that the Fed needed more time to assess the impact of Trump’s tariffs.
Inflation Surprises Reinforce Hawkish Outlook in Japan
Major economic releases in Japan revealed accelerating inflation, supporting the outlook for more BoJ rate hikes. The first report indicated that core inflation in Tokyo increased by 2.4%, beating estimates of 2.2%. The next reading revealed that inflation in the capital accelerated by 3.4%, above forecasts of a 3.2% increase. Both reports boosted the yen.
Meanwhile, Bank of Japan policymakers said the conditions for more rate hikes were well aligned. Therefore, the central bank would continue its tightening. However, the timing will depend on how much Trump’s tariffs have impacted Japan’s economy.
What Lies Ahead for USD/JPY: Key Drivers to Watch
In the coming months, traders will continue to monitor major economic releases from the US and Japan. These reports will show how much damage Trump’s tariffs have done to both economies. Moreover, market participants expect the BoJ to keep rates unchanged on May 1. The Fed might also hold in May.
However, the messaging during these meetings might increase volatility for USD/JPY. Analysts expect the BoJ to maintain its hawkish tone. However, some believe the central bank might have to delay further rate hikes. Meanwhile, the Fed might also delay rate cuts.
All focus will remain on US trade policy developments. A de-escalation in the global trade war would benefit the dollar and hurt the yen. Risk appetite would increase, causing cash to flow back into US assets. Meanwhile, demand for safe-haven assets will drop. On the other hand, if the global trade war escalates, USD/JPY will continue declining.
Technical Analysis: USD/JPY Faces Pressure at 140 Support
On the technical side, the USD/JPY price has paused after reaching the pivotal 140.01 key support level. Nevertheless, it remains below the 30-SMA, and the RSI is below 50, indicating that bears are in the lead.
The downtrend began when the price paused near the 158.05 resistance. Here, bears took charge by pushing the price below the SMA. At the same time, the RSI dipped below 50 into bearish territory.
The price has maintained its decline to the 140.01 support. However, bears have now met a solid hurdle. Previously, the 140.01 support led to a bullish reversal. If the support holds firm again, bulls might take over by breaking above the SMA and starting an uptrend.
However, if the price remains below the SMA, it might break below the support. A break below this level would strengthen the bearish bias.
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