USD/JPY React to Japan’s Growth and US Tariffs
The USD/JPY price has been volatile during the month amid economic and policy changes in the US and Japan. At the same time, market participants were watching developments in US trade policy and the impact on its trading partners.
USD/JPY Rebounds After Early Month Losses
In the last month, the USD/JPY pair has fluctuated, first falling and then climbing to cover most of its losses.
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Safe-Haven Demand Drives Yen Rally Amid Tariff Tensions
The recent drop in the pair came at the start of March as Trump prepared to impose tariffs on Canada and Mexico. The US president had promised a 25% tariff on both countries. Meanwhile, Canada and Mexico were ready to respond with counter-tariffs that would trigger trade wars. Therefore, it was a period of economic uncertainty and poor risk sentiment. This allowed the yen to rally against the dollar due to safe-haven demand.
Initially, Trump imposed these tariffs before suspending them for another month. However, he added a 10% tariff on Chinese goods, escalating the trade conflict between China and the US.
Moreover, the US president imposed tariffs on steel and aluminum imports, causing conflict with Canada and the Eurozone.
The Eurozone was ready to impose tariffs on US alcohol, pushing Trump to respond with threats of tariffs on alcohol products from the bloc. Market participants were increasingly worried about the global economy and a likely US recession, fueling the decline in USD/JPY.
Furthermore, the pair fell amid downbeat data from the US that increased expectations of Fed rate cuts. The monthly employment report revealed a smaller-than-expected increase in jobs. At the same time, the unemployment rate unexpectedly jumped to 4.1%, raising fears of a slowdown. Other reports on consumer sentiment, retail sales, and inflation showed a picture of a declining economy, putting pressure on the greenback.
Weaker Yen and Rising Dollar Reverse the Trend
On the other hand, the recent rise in USD/JPY came from a decline in the yen and a rebound in the dollar. The yen pulled back from its peaks when the focus shifted to the export-reliant Japanese economy. Trump’s tariffs will likely have an impact on the global economy. Therefore, Japan will also feel the pain of lower demand, especially with reciprocal tariffs.
Additionally, downbeat GDP data from Japan weighed on the yen. In the fourth quarter, Japan’s economy expanded by 0.6%, bigger than the previous reading. However, the figure missed forecasts, casting a shadow on the BoJ’s rate hike plans.
Meanwhile, the dollar rose as inflation expectations increased. A report revealed an unexpected surge in inflation expectations due to Trump’s tariffs. These tariffs will increase the cost of US imports, driving local prices higher. Moreover, a cautious tone during the FOMC policy meeting revealed no hurry to lower borrowing costs amid tariff uncertainty.
Economic and Policy Drivers Behind Recent Fluctuation
In the last 30 days, Japan and the US have experienced policy and economic changes that have driven price movements. Data from the US has shown a slowdown that could keep the Fed on its toes. However, higher inflation expectations mean the central bank will remain on the sidelines to watch Trump’s moves.
On the other hand, conditions in Japan are improving, giving policymakers more confidence to increase interest rates. However, like the Fed, the BoJ might pause to see the likely impact of US trade policies.
US: Slowing Jobs Growth and Tepid Inflation Pressure the Dollar
In the US, major economic releases included employment and inflation. The nonfarm payrolls report revealed that the economy added 151,000 jobs in February, missing forecasts of 159,000. Meanwhile, the unemployment rate increased to 4.1%, surprising economists who had expected it to hold at 4.0%. The downbeat report led to a decline in the dollar, pushing USD/JPY lower.
Moreover, inflation figures were softer than expected, putting pressure on the dollar. According to the CPI report, inflation increased by 0.2% compared to forecasts of 0.3%. Meanwhile, it increased by 2.8% annually, missing estimates of a 2.9% increase.
On policy, the Fed met and kept interest rates unchanged as expected. Meanwhile, Powell maintained that there was no hurry to lower borrowing costs. The uncertainty surrounding Trump’s tariffs will likely keep the central bank cautious.
Japan: Mixed Data and Policy Caution Amid External Uncertainty
Meanwhile, in Japan, economic data revealed that Japan’s economy expanded by 0.6% during the fourth quarter of 2024. This figure came below the forecast of 0.7%, weighing on the yen. A separate report revealed that Japan’s national core CPI increased by 3.0%, above estimates of 2.9%. The yen rose because higher inflation motivates the BoJ to keep hiking interest rates.
On policy, the Bank of Japan met and kept interest rates steady as expected. However, the yen fluctuated after policymakers said they would need time to assess the impact of Trump’s tariffs on the economy. This meant a more cautious approach to future rate hikes.
Trade Policy Uncertainty to Shape USD/JPY Direction
Investors will watch economic data from the US and Japan in the coming months. So far, the US economy is slowing down. If this continues, it will pressure the dollar, pushing USD/JPY lower. Meanwhile, Japan’s economy is steadying, giving the Bank of Japan more confidence to hike rates.
At the same time, traders will watch policymakers’ remarks for clues about future moves. However, all this will depend on Trump’s tariff moves. In April, markets expect the US to impose tariffs on Mexico, Canada, and automobiles. At the same time, a reciprocal tariff will affect more countries, escalating global trade wars. Therefore, US recession fears will surge. Meanwhile, the yen might rally on safe-haven demand. However, gains might be limited by economic worries.
USD/JPY Technical Outlook
On the technical side, the USD/JPY price has broken above the 22-SMA, indicating a shift in sentiment. Previously, the price traded in a solid downtrend below the SMA and made lower highs and lows.
At the same time, the RSI mainly kept below 50, showing solid bearish momentum. However, when the price reached the 147.02 support, it failed to continue lower. This allowed bulls to overpower bears and push the price above the SMA. At the same time, the RSI broke above 50, suggesting stronger bullish momentum.
This sentiment shift might be the start of a new bullish trend. However, bulls must start making higher highs and lows to confirm this. Such an outcome would allow the price to revisit the 153.03 and 158.05 resistance levels. However, if bears are not ready to give up control, they will return at the nearest resistance to resume the downtrend.
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